A Political Economy of Fiscal Space: Political Structures, Bond Markets, and Monetary Accommodation of Government Spending Potential in the Core and Periphery

In times of economic crisis, academics, policy-makers, and pundits often debate the correct level and best use of government debt. This paper argues structural political and economic factors grant core economies more fiscal space than peripheral economies. While the federal governments of the US, Germany, and other core economies may easily issue and sell debt in private markets, smaller economies, both municipalities within countries, and countries in the global periphery, are more vulnerable to demand fluctuations. All economies may benefit from explicit commitments by monetary authorities to resume their historic roles as governments’ banks, especially during crises. By highlighting present political constraints, monetary structures, and market factors that may inhibit governments’ successful placement of bonds, this paper deepens present debate about the potential feasibility of functional finance to facilitate fiscal activity, even in unprecedented times.