This model writes down an optimal spending problem of the government when they are faced with a one-time risk of contingent liabilities being realized. This analysis therefore strips away other sources of risks, and focuses on the problem of contingent liabilities arising from the financial sector. Since, other risks arising from longevity, short-term business cycle fluctuations are assumed away, the analysis here should be understood as one pertaining to the permanent (or detrended) component of government spending.
Prepared by Ruchir Agarwal (EUR).
A newly appointed government committee—the Inquiry on Swedish Government Debt Management—is tasked with exploring issues of long-term debt targets.
A potential downside to having a dedicated fund is that it exacerbates potential moral hazard by pre-committing to deploy funds in the event of a banking crisis. On the other hand, a benefit of having a fund is that it allows Sweden to have a sufficiently active and liquid market for sovereign debt by not limiting the size of debt levels.
A different question is whether the existing debt level or funds accumulated in the Swedish Stability Fund do already provide the required buffer.