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Government Debt: A Key Role in Financial Intermediation

Author/Editor: Kumhof, Michael | Tanner, Evan
Authorized for Distribution: March 1, 2005
Electronic Access: Free Full Text (PDF file size is 507KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: The literature on optimal fiscal policy finds that highly volatile real returns on government debt, for example through surprise inflation, have very low costs. However, policymakers are almost always very apprehensive of this option. The paper discusses evidence concerning features of developing country financial markets that are missing in existing models, and that may suggest why this policy is considered so costly in practice. Most importantly, domestic banks choose to be highly exposed to government debt because the alternative, private lending, is more risky under existing legal and institutional imperfections. This exposure makes banks and their borrowers vulnerable to the government's debt policy.
 
Series: Working Paper No. 05/57
Subject(s): Fiscal policy | Taxation | Inflation | Public debt
Author's keyword(s): Optimal fiscal Policy | Distortionary taxation | inflation | government debt
 
English  
    Published:   March 1, 2005        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2005057   Pages:   29
    Price:   US$15.00
       
     
Please address any questions about this title to publications@imf.org.