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Comment
- Edited by Lars Jonung
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- Book:
- The Stockholm School of Economics Revisited
- Published online:
- 05 July 2013
- Print publication:
- 29 March 1991, pp 364-366
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- Chapter
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Summary
The Stockholm School set out to perform a very ambitious dynamic macroanalysis, their so-called sequence analysis. However, the school was faced with a number of problems since it lacked the necessary tools for such analysis. Let me mention some of these problems.
Expectations and expectations formation were crucial for the dynamic method, but the Stockholm School did not have a theory of expectations. The participants of the School instead assumed arbitrarily given expectations. The exception was that of Lindahl's self-fulfilled expectations in a deterministic framework, that is, the assumption of perfect foresight in an intertemporal general equilibrium setup.
The Stockholm School also suffered from having insufficient microfoundations for its behavioral assumptions. They either lacked the capacity or the desire to provide such microfoundations. Instead they assumed rather arbitrarily given response functions. Lindahl assumed, for instance, that when expectations were fulfilled, ex ante plans for the next period were a function of ex post realizations of the current period. Lundberg assumed, for instance, that investment was a given function of current profits, regardless of whether or not expectations were fulfilled. These arbitrary assumptions led to arbitrary conclusions, what David Laidler calls a bewildering variety of possible outcomes depending upon the specific set of assumptions made.
Discussion
- Edited by Rudiger Dornbusch, Mario Draghi
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- Book:
- Public Debt Management
- Published online:
- 05 July 2011
- Print publication:
- 30 November 1990, pp 118-124
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Summary
Maturity structure does matter and it should be of particular concern for the management of public debt. The Italian ‘authorities should, up to a point, “bite the bullet”. They should issue long-term debt even at relatively high interest rates, since accepting a shortening of the average maturity may be counterproductive: by increasing the possibility of a confidence crisis, it may lead to a larger risk premium and a higher average cost of servicing the total outstanding debt’ (Alesina et al., in this volume).
Alesina, Prati and Tabellini reach these policy conclusions in their brilliant and provocative paper and support them by two major empirical claims intended to show the reluctance of the Italian authorities to follow this harsh course.
(1) After 1985 the interest rate on the one-year Treasury Bill, to which a good part of the CCT (Certificates of Treasury) are indexed, was – thanks to the type of auction system used – being manipulated so as to keep it artificially lower than the short-term 3-months Treasury Bill. The authorities, after having kept it higher when the debt was issued, were succumbing to the temptation ‘to reduce it once the private sector is locked into an irreversible investment decision, thereby inflicting a capital loss on their debt holders’ (ibidem). Therefore they created a time inconsistency and caused an investors' confidence crisis which led to a funding crisis in 1987 and ultimately to the issue of maturities much shorter and/or more expensive.