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Journal articles (2004), Economics Letters, pp. 205-211

Default on Sustainable Public Debt: Illiquidity Suspect Convicted

BESANCENOT D., HUYNK K., VRANCEANU Radu

According to a well-established economic principle, any public debt that does not exceed the discounted stream of future primary surpluses should find buyers. This paper argues why this principle may not hold if the government has only imperfect control over its net income flow. A small risk of unsustainability appears to be at the origin of a much larger risk of illiquidity. Solving the model for the rational expectations equilibrium, we find that the maximum debt level that investors are willing to hold may be much lower than the commonly used sustainable level,

BESANCENOT, D., HUYNK, K. and VRANCEANU, R. (2004). Default on Sustainable Public Debt: Illiquidity Suspect Convicted. Economics Letters, pp. 205-211.