Marco Arnone

This discussion paper critically reviews a new book by Aoki and Yokishawa and presents some of the techniques adopted by the authors as a new approach to the foundations of macroeconomics. The paper discusses some of the main techniques of statistical mechanics relevant in this context, namely the Master Equation and the Polya Urn. The former is a key instrument for deriving some Keynesian results throughout the book, in particular the role of effective demand in stimulating the economy; additionally, it is used to assess the role and significance of uncertainty and to re-examine so-called «policy ineffectiveness», showing instead the positive contribution of an active economic policy. The Polya Urn is used to show demand saturation as a growth limiting factor and demand for new products as a growth-enhancing one, with the clear objective of linking the Keynesian principle of effective demand (short term) with a long-term growth theory.

In this paper we broaden the standard debt sustainability framework used in the IMF-WB Heavily Indebted Poor Countries (HIPC) Initiative to include the analysis of domestic public debt and other feedback effects into the usual debt sustainability analysis (DSA). The latter does not take into account the fully-fledged government budget constraint and the feedback effects of the fiscal and monetary adjustment required by multilateral programs. This work focuses on the evaluation of total public debt sustainability in a simple accounting framework that includes exchange rate effects. We use new data on domestic public debt and show how the switch from foreign to domestic borrowing, and rising domestic real interest rates are likely to undermine the overall sustainability and the success of debt relief programs.