rate determination in the presence of long - run debt and shows that short - term manipulations of the inflation rate are not very effective in reducing the real value of government debt. rather, in addition to a high average maturity of outstanding government debt it would take a persistent increase in the expected inflation target to achieve a sizable reduction in the real debt burden. such a policy is definitely not advisable : apart from the costs associated with higher inflation, central bank credibility, established in past decades at great costs and now one of our most important assets, would be seriously or even critically damaged. the papers by adam and grill, as well as uhlig, investigate the alternative, that is, disruptive means of reducing public debt : sovereign default. it is easily overlooked that in advanced economies, sovereign default is usually a political decision rather than an economic necessity. hence, understanding the reasons why governments decide to default on parts of their debt is crucial for developing strategies on how to avoid such situations in the first place. adam and grill address this fundamental question, and show the conditions under which it is optimal for a country to occasionally default on its debt after large shocks. defaults are rare events if they are costly for a country. however, this result applies to a model without contagion across countries and perfectly insured international investors. uhlig tackles these issues in the setting of a currency union, taking into account many of the additional aspects that complicate the situation we face now. in his model, membership in a monetary union and the resulting prospect of financial assistance to counter the risks of contagion can extend a country ’ s borrowing constraint and weaken the incentive to consolidate. in the end, there is certainly a non - negligible risk of only delaying, rather than averting, a default. because of this mechanism and the large risks borne by the tax - payers of countries granting financial support, conditionality has to be a core principle of such support programmes – bis central bankers ’ speeches including those launched in the european debt crisis. conditionality has two dimensions : ex ante, countries have to commit to a credible and frontloaded adjustment programme in order to get access to financial support, a programme that is suitable to restore the sustainability of, and thus confidence, in public debt. ex post, once financial support has started to flow, compliance with the programme has to be monitored continuously, and deviations from the programme have to be corrected swiftly and convincingly. if a country

, even more importantly, only sound public finances generate the credibility that is necessary for discretionary measures to be effective. once credibility is lost, fiscal multipliers become zero bis central bankers ’ speeches or might even turn negative. furthermore, as long as structural problems exist, stabilisation cannot be a substitute for reforms. in this regard, the experience of past crises teaches us another lesson : more often than not, structural deficiencies are wrongly interpreted as a lack in aggregate demand, leading to an overstimulation of the economy that may well lay the basis for the next crisis. as both fiscal policy and monetary policy have to find an exit strategy, the question arises of how the respective exits should be sequenced, given the interactions between the two policy areas. angeloni, faia, and winkler took such a perspective in their policy - oriented paper that simulates different exit scenarios. they make clear that in returning to normal conditions, fiscal and monetary policy should work together. an interesting result of the simulations is that rapid consolidation by the fiscal sector is preferable to gradual approaches. at the same time, spending - based consolidation is preferable to revenue - based consolidation. regarding the sequence of fiscal and monetary policy exits, angelonie, faia and winkler find that fiscal policy should exit first. in europe, we see a situation in which in some countries confidence in public finances has eroded massively, which in turn complicates matters for monetary policy. while this problem is most pressing in the euro area, it is also relevant for other countries ; fiscal dominance is no longer a mere theoretical notion but a real threat. this was forgotten during the great moderation but has now become a highly relevant issue. the world over, awareness of the urgent need for fiscal consolidation has increased. however, confidence in the sustainability of public debt will only stay firm, let alone be restored where it is at stake, if this awareness quickly translates into credible and ambitious steps to cut expenditure or raise revenue. otherwise, it will be increasingly difficult to convince investors and the public that the alternatives to consolidation, namely sovereign default or a debt - reducing inflation, can be ruled out. the serious risks emanating from these alternatives are discussed in three papers. krause and moyen highlight the quantitative effects of an increase in inflation targets in the united states aimed at reducing the real value of outstanding obligations, as discussed by blanchard, rogoff and others at various occasions. the applied model combines forward - looking interest