Raquel Fernández and Alberto Martín explore the role of debt maturity on the frequency with which a country enters a debt crisis and on the severity of the latter.
Barcelona GSE research on VoxEU.org by Alberto Martín and Jaume Ventura
There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.
Fernando Broner, Aitor Erce, Alberto Martín, and Jaume Ventura provide a new and original view of this sovereign debt crisis, drawing heavily from insights obtained in their earlier theoretical work.