Obstfeld: Weak ex ante financial constraints prompt 'bad equilibria' in markets
A precautionary approach to fiscal policy, leading to moderate levels of public debt in relation to GDP, is essential for the credibility of government promises to support the financial system, Maurice Obstfeld argues in a discussion paper published today by the Bank of Japan (BoJ).
Obstfeld writes in On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability that expectations about post-crisis governmental responses will influence behaviour in financial markets, "and
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