Inflation and sovereign default

Recent research has highlighted the role that the government budget constraint plays in determining the consumer price level. According to the fiscal approach to price determination, prices adjust to adjust so that the discounted value of future real government primary surpluses equals the current real value of public debt. An important implication is that the probability, of a crisis involving default oil public debt may directly, affect consumer prices. This paper examines the interaction of prices and sovereign insolvency crises using simple, continuous-time models of the government budget constraint.