DP351 Public Confidence and Debt Management: A Model and a Case Study of Italy

Author(s): Alberto F Alesina , Alessandro Prati , Guido Tabellini

Publication Date: October 1989

Keyword(s): Confidence Crisis , Debt Crisis , Government Debt , Public Debt

JEL(s): 311 , 322

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP351.asp

High-debt countries may face the risk of self-fulfilling debt crises. If the public expects that in the future the government will be unable to roll over the maturing debt, they may refuse to buy debt today and choose to hold foreign assets. This lack of confidence may then be self-fulfilling. This paper argues that under certain conditions, the occurrence of a confidence crisis is more likely if the average maturity of the debt is short. Conversely, a long and evenly distributed maturity structure may reduce the risk. We consider the recent Italian experience from this perspective. In particular we ask whether recent developments in the market for government debt show signs of unstable public confidence and a risk premium.