Monday, September 5, 2011

No Free Lunch

A new paper by Maurice Obstfeld:


This paper argues that if policymakers seek to enhance global
liquidity, then the international community must provide a higher and
better coordinated level of fiscal support than it has in the past.
Loans to troubled sovereigns or financial institutions imply a credit
risk that ultimately must be lodged somewhere.  Expanded
international lending facilities, including an expanded IMF, cannot
remain unconditionally solvent absent an expanded level of fiscal
backup.  The same point obviously applies to the European framework
for managing internal sovereign debt problems, including proposals
for a jointly guaranteed eurozone sovereign bond.  Even attainment of
a significant role for the Special Drawing Right depends upon
enhanced fiscal resources and burden sharing at the international

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