Report
Is public debt a risk-free asset?
In the simplest theory, public debt is a risk-free asset because: A country can always increase the tax burden or reduce public spending to become solvent again; A country can always monetise its public debt (use seignorage). Public debt is no longer a risk-free asset and there may be a default on this debt in countries where both of these two statements are false , because: The tax burden is already so high that it is impossible to increase it further; The population’s taste for public spending is so strong that governments refrain from reducing it; The country does not have its own central bank or the rules prohibit it from monetising public debt. This situation where a default on the public debt is possible in theory is perhaps found in some euro-zone countries such as France and Italy.
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Patrick Artus
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