Viability of Fiscal and Monetary Stabilization Policies - Interrelations of the Structure of Government Deficits, Public Debt and Financial Instability: A Preliminary Analysis of the Czech Republic

Using Hyman Minsky's theoretical framework of the financial instability hypothesis (FIH), mainly the notion of margins of safety, and to a lesser degree Irving Fisher's debt-deflation theory (DDT), we shall reason that in face of a significant drop in the aggregate output, the fiscal policy might not be able to "reflate" households' and entrepreneurs' profits creating a possible feedback loop to a financial sector that in turn might limit the government's ability of deficit financing via the indirect debt monetization unless a central bank resort to another "whatever-it-takes" policy. More so, we shall try to illustrate that a "Catch-22" situation may develop in connection to regulation imposed by a central bank on financial intermediaries as well as the implications stemming from our proposed dynamics.