Public debt sustainability and EMU : theory and some evidence
The thesis focuses on the interaction between default and inflation risk on public debt bonds. We lighten the trade-off between flexibility to adverse shocks and credibility, in the debt management field, and identify the conditions under which the credibility effect can be dominant. EMU is now fully operating, including most of the European candidates that have been let in under a more relaxed interpretation of the Maasticht Treaty criteria. In particular, the debt criterion originally set at 60% of the GDP, was reinterpreted to require a debtlGDP ratio declining towards the target. As some of the countries have levels of debt above 100% of GDP (Belgium and Italy) and as European Central Bank is committed to price stability, what does giving up inflation imply for post-EMU debt management?