Hayashi, Fumio; (1982), “The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables” Journal of Political Economy; Vol. 90; October; pp. 895-916.
Ricardo, David; (1957), “Funding System” in P. Sraffa, ed., The Works and Correspondence of David Ricardo, Cambridge University Press, Cambridge.
Runkle, David E.; (1988), “Liquidity Constraints and the Permanent Income Hypothesis: Evidence from Panel Data” Federal Reserve Bank of Minneapolis, Nov.
Sargent, Thomas J., and Neil Wallace; (1981) “Some Unpleasant Monetarist Arithmetic” Federal Reserve Bank of Minneapolis, Quarterly Review, Fall, 1-17.
I thank Jeff Davis, Adrienne Cheasty, George Abed, Steven Symansky, Thomas Reichmann, Bob Traa, Luis Catão, Evan Tanner, Rina Bhattacharya, David Owen, James Wein, Alfred Kammer, Paul Mathieu, Arup Banerji, Valerie Mercer-Blackman, Dominique Desruelle, and FAD seminar participants for helpful conversations and suggestions. All errors are my own.
That is, there will be some fiscal consolidation in period two to provide some room for the payment of the newly assumed obligations.
I thank Paul Mathieu for suggesting this point to me.
When the government enacts the necessary transfer of funds to the bank.
Some of the BOCONs were later redeemed at a discount with the proceeds from the privatization of t h e state petroleum company, YPF.
“Russia Close to Sealing $26bn Debt Agreement;” Financial Times, October 1, 1997.
For simplicity I will assume that the borrowing and lending interest rates are identical.
In our example, the optimal quantities are given by:
They know with certainty the amount to be paid, whether it is total amount owed corrected for back inflation, or only partial payment.
The same result would be observed in an overlapping generations model with perfect capital markets, where there are no liquidity constrained agents, but where the old generation would sell the securities to the young generation.