Research Topics

Originally issued as EDI Working Paper No. 17, March 2024
This paper challenges the prevailing view in the sovereign debt literature by arguing that sovereign debt markets, in many respects, behave similarly to other credit markets. These markets are hierarchical rather than flat, inherently hybrid in nature, blending elements of public order and private markets, and regularly suffer from liquidity stress. Therefore, sovereigns, similarly to private actors in the market, are subject to liquidity stress and insolvency crises in a way that is integral to the global financial architecture. Critically, the legal and institutional design of the international monetary system exacerbates this stress. Structural asymmetries, notably the uneven distribution of monetary power, lead to liquidity stress being more pronounced in the periphery than at the apex or core of the system, rendering the former inherently more vulnerable to sovereign debt crises.

The paper argues that such considerations should assume a central role in global policy discussions concerning the most appropriate mechanisms for addressing sovereign debt crises. It advocates for a reformed global financial architecture, emphasizing the necessity of a legally binding framework for sovereign debt restructuring that draws upon principles of corporate restructuring law, with the UK Companies Act 2006 (CA 2006) providing relevant analogies. This approach aims to ensure timely, equitable, and efficient restructuring processes, thereby confronting the challenges posed by the current ad hoc and often inequitable sovereign debt restructuring processes.

Originally issued as EDI Working Paper No. 08, 2022 
This paper evaluates the relationship between monetary and fiscal policy and the relative effectiveness of macroeconomic stabilization through the lens of Modern Money Theory (MMT). We articulate previously-neglected aspects of monetary sovereignty to offer a new interpretation of the Bernanke Doctrine that emerged in the wake of the 2008 Global Financial crisis. This Doctrine validated key MMT precepts and paved the way for fiscal policy activism in response to COVID19. The paper argues that fiscal and monetary policy coordination is not new or rare. It is an intrinsic feature of sovereign monetary regimes, allowing for more effective policy responses to financial crises or pandemics. To the extent that monetary policy is able to stabilize an unstable economy, it is largely due to its fiscal components. This recognition also calls for a rethinking of fiscal policy. 

Money, in this paper, is defined as a power relationship of a specific kind, a stratified social debt relationship, measured in a unit of account determined by some authority. A brief historical examination reveals its evolving nature in the process of social provisioning. Money not only predates markets and real exchange as understood in mainstream economics but also emerges as a social mechanism of distribution, usually by some authority of power (be it an ancient religious authority, a king, a colonial power, a modern nation state, or a monetary union). Money, it can be said, is a “creature of the state” that has played a key role in the transfer of real resources between parties and the distribution of economic surplus.

In modern capitalist economies, the currency is also a simple public monopoly. As long as money has existed, someone has tried to tamper with its value. A history of counterfeiting, as well as that of independence from colonial and economic rule, is another way of telling the history of “money as a creature of the state.” This historical understanding of the origins and nature of money illuminates the economic possibilities under different institutional monetary arrangements in the modern world. We consider the so-called modern “sovereign” and “nonsovereign” monetary regimes (including freely floating currencies, currency pegs, currency boards, dollarized nations, and monetary unions) to examine the available policy space in each case for pursuing domestic policy objectives.

This working paper is also available in Spanish and Catalan.

During the past two decades of economic stagnation and persistent deflation in Japan, chronic fiscal deficits have led to elevated and rising ratios of government debt to nominal GDP. Nevertheless, long-term Japanese government bonds’ (JGBs) nominal yields initially declined and have stayed remarkably low and stable since then. This is contrary to the received wisdom of the existing literature, which holds that higher government deficits and indebtedness shall exert upward pressures on government bonds’ nominal yields. This paper seeks to understand the determinants of JGBs’ nominal yields. It examines the relationship between JGBs’ nominal yields and short-term interest rates and other relevant factors, such as low inflation and persistent deflationary pressures and tepid growth. Low short-term interest rates, induced by monetary policy, have been the main reason for JGBs’ low nominal yields. It is also argued that Japan has monetary sovereignty, which gives the government of Japan the ability to meet its debt obligations. It enables the Bank of Japan to exert downward pressure on JGBs’ nominal yields by allowing it to keep short-term interest rates low and to use other tools of monetary policy. The argument that current short-term interest rates and monetary policy are the primary drivers of long-term interest rates follows Keynes’s (1930) insights.