Last modified: 2017-05-27
Abstract
This paper discusses the theories of public debt from the Keynesian and Post Keynesian perspective as well as from the neoclassical perspective since neoclassical synthesis. Aiming at clarifying how government bond are discussed within these approaches, it briefly exposes the focus of these theories on debt burden, crowding out effect and debt neutrality while relatively neglecting monetary policy. Then, the paper moves to discuss how the Monetarist critique, the emergence of New Keynesian school and the New Monetary Consensus allow monetary policy to enter into this debate. These three events result in the predominance of monetary policy over fiscal policy, which is then confirmed through the discussion of how monetary policy is encouraged and prescribed by international financial institution and the debt management literature based on the use of government bonds as key tools for the development of bond markets.
It is showed that, despite the difference between the traditions mentioned above, the debate on government bonds is embedded in a context of deficit expenditure and public debt based on a clear and intrinsic association between bond-financed expenditure, expansionary fiscal policy and public indebtedness. The dominance of monetary policy does not change this tradition and, even though it is acknowledged that government bonds are financial instruments/tools used to perform some of the forms of monetary policy, rarely the link between monetary policy and government bonds in terms of the financial cost for the public sector is directly discussed by the theories of public debt.
The papers concludes arguing that these approaches are prisoners of a tradition that is much related to what O'Connor (1973) defined as a ‘simplistic' approach to the public finance, in which economists restrict themselves to estimate the volume of the state spending necessary to affect desired changes such as high employment or more rapid accumulation or growth. As a consequence, DPD is the reflection, i.e., an image, of fiscal policy and there is not a direct and specific discussion on government bonds assuming an even broader role for achieving a sound economy as tools of managing and controlling financial markets, which implied a rather active role played by these bonds than a passive one result of fiscal deficits. This imposes limits to understand monetary policy and public debt in the context of growing importance of financial markets.