Debt sustainability and the range of multiple equilibria

The authors characterize the size of the range of multiple equilibria in sovereign debt markets. They show that the nature of the equilibrium depends crucially on the degree of uncertainty, which they formalize first as uncertainty about primary balances and later as uncertainty about the fiscal feedback rule. For low uncertainty, the range can be large, but it becomes smaller as uncertainty becomes larger. If uncertainty is large enough, the multiplicity disappears. The interest rate is then un

Source: Peterson Institute (PIIE)