We study the information sensitivity of government debt denominated in domestic versus foreign currency: the former is subject to inflation risk and the latter to default. Default only affects sophisticated bond traders, whereas inflation concerns a larger and less informed group. Within a two-period Bayesian trading game, differential information manifests itself in the secondary market, and we display conditions under which debt prices are more resilient to bad news even in the primary market, where only sophisticated players operate. Our results can explain debt prices across countries following the 2008 financial crisis, and also provide a theory of “original sin.” (JEL D84, F34, H63)
No abstract
The first methodological hypothesis that governs this essay is that, to talk about "the enemy" and the intellectual "images" it produces, one must first understand the link that binds war, in its relation with politics, to the figure of the enemy. Indeed, variations in the form of the one correspond to mutations in the representations of the other. As such, this essay will off er a summary of the epochal articulations that have been used to frame this topic.Th e second hypothesis is that, while the category of "enemy" certainly has to do with individual and collective self-identity-that is to say, with the Us-the enemy is nonetheless never fully alien: it is never the bearer of a dissimilarity so radical that, through its mere existence, it could strengthen the identity of the Us from the outside. Th e enemy is instead, and more often, the pole of a relation, although a hostile one: if, to produce a fully formed Us, we need an enemy to exclude, this means that we cannot do without the enemy, that the enemy is somehow constitutive of our own identity, that it O n Wa r a n d o n t h e E n e m y 196 • is therefore always internal to the Us. Th e friend bears the enemy inside, not outside of itself. Th e enemy is bound up with our identity, not only because it makes it be, but also because it has the potential to make it not be: the enemy not only determines our own identity, but also threatens it from within. Th e enemy is not then radically dissimilar to the Us. Rather, even though it brings subtle and deadly diff erences into the Us, it is similar to the Us to the point of being disquieting and anguishing. Th e enemy is, in short, not only feindlich but also unheimlich. Th e disturbing implication of this relationship between friend and enemy-the one being internal to the other-is that peace is potentially infiltrated by war, and that war and peace, even if so apparently distant from one other, in reality have a secret relation that always poses the risk of collapsing them into indistinction.Émile Benveniste's etymological research (in his 1969 Le Vocabulaire des institutions indo-européennes) showed that hostis (a term that is stronger and semantically more complex than advena and peregrinus) is originally "the stranger within us. " Later on, the strengthening of internal political identity privatizes the stranger as "host" (hospes) and publicizes and exteriorizes it as "enemy" (hostis). It is not by chance that, in Th e Persians, Aeschylus makes Atossa, Dario's widower and Xerxes's mother, say that Asia and Hellas (two women in a fight with each other whom Xerxes, who appeared to Atossa in a dream, wanted to yoke to his cart), even if so diff erent from each other (Asia docile, Europa untamed), were sisters born from the same parents (2009, 185).Precisely like war and politics, the enemy thus has a function that is ambiguous, even ungraspable. Th ese notions may seem intuitively easy to define and to conceptualize, but the moment one scrutinizes them more closely, they reveal themselves to be changing and elusiv...
This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders' beliefs. This result is reminiscent of the European debt crisis of 2010-12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis.
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