The Interdependence between Public and Private Debt

In this paper (which was part of my PhD thesis 11 years ago - but at that time it was not "realistic") we had highlighted the importance in considering the interdependence of government budget constraints when considering European fiscal institutions. In the simplified version of economic integration described in the model, private sector would hold the only assets available, i.e. public debt, and this will be the channel of interdependence between countries.

The model is useful in thinking about the present European crisis. One thing that the European fiscal crises put in evidence is the interdependence between private and public budget constraints and between the debt position of all the member countries. The picture gives an idea of the web of relationships across the union. It might therefore be important to develop a model where this interdependence is taken explicitly into account.