Citation Context

...apture all the concerns that government debt managers have in mind when they talk about the “rollover risk” associated with short-term financing. Specifically, one can imagine that even if the discount factor β were fixed, it might be imprudent for the Treasury to put itself in the extreme position of having to roll over all outstanding T-bills every night. Such a strategy might increase its vulnerability to bankrun-type problems, whereby a sudden fear about the government’s ability to service its debts leads to a sharp increase in borrowing costs and makes the run a self-fulfilling prophecy (Bohn (2011)). However, before one invokes run risk as a reason not to issue more T-bills, it is important to remember the core message of the model: what matters is not the absolute social cost created by a given government debt-maturity structure, but the government’s comparative advantage in bearing this cost. While it is one thing to argue that the government may face some amount of run risk when issuing a large quantity of short-maturity debt, it is quite another to argue that it is not better-suited than the private sector to bearing such run risk. VI. Conclusions A growing body of evidence suggests...

Citation Context

...ll-covered (see Helleiner 2011 for a review). In characterizing the political effects of financial crises, it is helpful to catalog specific moments at which ideas shape the political effects of financial crises. First, conditional on the broad acceptance of that a country is experiencing a crisis at all (which may itself be contested), ideas shape understandings the crisis’s nature. The economic policy debate in the U.S. since 2008 illustrates this well. This debate involves sharp disagreements about whether the U.S. has experienced a banking crisis, or more seriously, a looming debt crisis (Bohn 2011). Policy debates around the debt ceiling showdown of mid-2011, and the fiscal cliff showdown of late 2012, reveal the centrality of ideas in diagnosing the “true” crisis facing the U.S. economy. If ideas shape understandings of the nature of crises, then they also shape the logic of policy responses. For example, if a financial crisis is understood to be just a banking crisis, then fiscal consolidation is unnecessary—the task is to adjust, and perhaps to implement some financial reforms. If the crisis is actually an incipient debt crisis, then the long term viability of 22 the economy is in qu...

Citation Context

...atter plot of the real interest rate on 3‐month treasury bills against the debt‐gdp ratio for the US, 1939‐2014.14 The evidence fails to support crowding out. The US has seen large variations in the debt ratio but the correlation with interest rates is, if anything, negative. This lack of support for crowding out is confirmed by more detailed studies. In the words of Engen and Hubbard (2005, p.83), “some economists believe there is a significant, large, positive effect of government debt on interest rates, others interpret the evidence as suggesting that there is no effect on interest rates”. Bohn (2010, p.14) makes a similar statement about the difficulty of finding significant interest rate effects of debt. He goes on to 14 The picture is qualitatively similar for other interest rates. 14 suggest that a “leading explanation is Ricardian neutrality”. Imperfect functional finance, however, would seem a more plausible explanation. The relevance of functional finance can be questioned from another angle: policy makers may, it is suggested, be unable to control the real rate of interest on public debt. Chalk (2000, p. 319) argues that some OECD countries “have seen an explosion in their indebte...

Citation Context

... the government vulnerable to bank-runsproblems, whereby a growing fear about the government’s ability to service its debts leads to assharp rise in interest costs and makes the fear self-fulfilling (=-=Bohn 2011-=-). However, a variety ofsvalues to the same asset. Proofs of Ricardian equivalence also assume that agents have infinite horizons and this issoften cited as a reason why Ricardian equivalence may fail...