contingent capital tail risk and debt induced collapse we study the design and incentive effects of contingent convertible debt with contingent convertibles the endogenous bankruptcy boundary can be at either of two levels one with lower default risk or one at which default precedes conversion an increase in debt moves the firm from the first regime to the second a phenomenon we call debt induced collapse setting the conversion trigger sufficiently high avoids this hazard given this condition we investigate the effect of contingent capital and debt maturity on optimal capital structure debt overhang and asset substitution we calibrate the model to large banks during the financial crisis received april 10 2015 editorial decision march 20 2017 by editor leonid kogan

market triggered changes in capital structure equilibrium price dynamics we analyze the internal consistency of using the market price of a firm s equity to trigger a contractual change in the firm s capital structure given that the value of the equity itself depends on the firm s capital structure of particular interest is the case of contingent capital for banks in the form of debt that converts to equity when conversion is triggered by a decline in the bank s stock price we analyze the problem of existence and uniqueness of equilibrium values for a firm s liabilities in this context meaning values consistent with a market price trigger discrete time dynamics allow multiple equilibria in contrast we show that the possibility of multiple equilibria can largely be ruled out in continuous time where the price of the triggering security adjusts in anticipation of breaching the trigger our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed for the design of contingent capital with a stock price trigger this condition may be interpreted to mean that conversion should be disadvantageous to shareholders and it is satisfied by setting the trigger sufficiently high uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria we illustrate precise formulations of these conditions with a variety of applications

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

collusion and overlending i introduction for a long time have korean companies been engaged in unbridled expansionism financed through loans inefficient octopus style management and over and duplicate investment thus expediting the structural failure of the economy this failure to concentrate on profits consolidation and efficiency provided the fuse to the bankruptcy bombs that triggered the foreign exchange and economic crises the collusion between the conglomerates financial sector and politicians made this financial monopoly possible chosun ilbo december 26 1997 collusion and overlending in the korean financial sector may be best illustrated by the above editorial highlight of chosun ilbo the most read newspaper in korea its 1997 financial crisis is primarily triggered by continual bankruptcies of chaebols conglomerates which with assistance from politicians had borrowed heavily from financial institutions in financing their investment projects 1 unlike some other asian countries experiencing problems in their financial sector due to shifts in investment projects toward real estates such as japan hong kong and thailand chaebols in korea concentrated mostly on manufacturing activities 2 in this study we establish a tractable model of overlending with three key players namely chaebols financial institutions and politicians as highlighted in chosun ilbo the model is designed to achieve two primary goals that are crucial for matching some key observations during the korean turmoil first we illustrate how overlending can be an equilibrium outcome with collusion between chaebols and politicians when the economic environment is favorable this occurs despite that such a collusion distorts normal borrowing lending operation by causing a discernible shift in loan composition from more to less productive investment projects second we show that as the economic environment gradually deteriorates there can be a shift from a collusion to a no collusion equilibrium the combination of deterioration in fundamentals and expectations of an equilibrium shift can trigger economy wide financial crisis more specifically we construct a simple principal supervisor agent model of corruption and overlending the principal is the formal authority of loan decision making of a financial institution or in short the financial institution the supervisor is a politician who serves as the informational intermediary in the borrowing lending arrangement via his her connections and networking 3 the agent is a chaebol of an unknown type which seeks for external financing of a set of risky projects a politician s favorable signal about the borrowing chaebol s overall performance would grant the approval of the loan to finance an array of risky projects whose returns depend on idiosyncratic shocks that cannot be washed out in aggregation within the chaebol as an outside alternative to making the loan the financial institution can invest in the world capital market where a fixed rate of return is guaranteed this portfolio decision depends on a comparison of the expected average returns on the given set of risky projects with the safe returns on investments in the world capital market while both the chaebol s type and the state of nature are unobservable to the financial institution we for simplicity assume that politician s connections and networking can fully uncover the true type of the chaebol this valuable information possessed by the politician is one that the financial institution has an incentive to purchase but a low type chaebol has an incentive to conceal whether the politician ends up revealing truthfully this information depends on how much to obtain from the lender in terms of general support versus how much to gain from the borrower in terms of bribes or side payments when a low type chaebol has the politician on its side information is distorted and a collusion equilibrium arises

the politics of speculative attacks in industrial democracies recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack we argue that political processes and partisan objectives inform expectations about the government s commitment to the exchange rate first market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse second party labels provide information to currency traders about the policy objectives of a potential government consequently we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy a discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995 the predicted values are then used as a proxy for market expectations in a model of speculative currency crises

adjustment policies in developing countries a reassessment this paper analyzes policy responses to external shocks of the 1973 76 and 1979 81 periods in developing economies grouped according to the level of industrialization and the policies applied it is shown that outward oriented economies relied largely on export promotion and import substitution to offset the balance of payments effects of external shocks in both periods inward oriented economies failed to apply such output increasing policies of adjustment rather they financed the balance of payments effects of external shocks by foreign loans in the 1974 76 period and had to take deflationary measures in 1979 81 when their increased indebtedness limited the possibilities for further borrowing the policies applied led to rates of economic growth substantially higher in outward oriented than in inward oriented economies with growth rates in 1983 averaging 5 percent in the first case and practically nil in the second

economic development and income distribution in japan an assessment of the kuznets hypothesis in this paper the author estimates the income distribution in pre war japan for 1921 39 two sets of statistics were combined national personal income tax data for high income classes and household tax one of the local taxes data in 149 villages 45 towns and 16 cities for low income classes for 1891 1921 a preliminary estimation was attempted based on 39 selected villages towns and cities from this estimation he found a regressing income distribution for the pre war period and a dramatic decrease in inequality between pre war and post war periods the first finding supports the kuznets hypothesis the second does not rather it suggests that the relatively equal distribution in contemporary japan was nor a natural consequence of economic growth but a result of institutional changes immediately after the second world war copyright 1998 by oxford university press

equity recourse notes creating counter cyclical bank capital we propose a new form of hybrid capital for banks equity recourse notes erns which ameliorate booms and busts by creating counter cyclical incentives for banks to raise capital and so encourage bank lending in bad times they avoid the flaws of existing contingent convertible bonds cocos in particular they convert more credibly so erns also help solve the too big to fail problem rather than forcing banks to increase equity we should require the same or larger capital increase but permit it to be in the form of either equity or erns this also gives some choice to those who claim rightly or wrongly that equity is more costly than debt erns can be introduced within the current regulatory system but also provide a way to reduce the existing system s heavy reliance on measures of regulatory capital jel g21 g28 g32 g10

on income convergence among china hong kong and macau hong kong and macau were reunited with china in the late 1990s as two special administrative regions sars over the last half century they were china s good examples of economic development windows of openness and investors owing to historical reasons china lagged far behind hong kong and macau in terms of per capita incomes however rapid economic growth in china over the last three decades must have brought about a significant convergence of the three economies china s economic success has benefited from the integration of its two sars and the coastal provinces especially guangdong in terms of technological spillover massive investment and trade the economic trickledown direct investment and trade must have been important drivers of economic integration and income convergence this paper aims to analyse the trend and studies the determinants of income convergence between china and its two sars both parametric and non parametric techniques are employed to quantify the pace of convergence on per capita incomes in hong kong macau and the chinese provinces over a period of more than 40 years we find no evidence of convergence in the pre reform period but strong evidence of both absolute and conditional convergence in the post reform period over the reform period the pace of convergence is less than 1 per cent per annum without controlling for trade and more than 2 per cent conditional on trade

forecasting regional income inequality in china abstract in this study the mathematical models with gini coefficients and variation coefficients are used to study the time series properties of china s regional income differences the result shows that from 1952 to 1978 the differences increase from 1978 to the beginning of 1990s decrease and from the beginning of 1990s to 1995 increase a little in addition the multi level autoregressive models with time varying parameters are used to predict the differences of china s regional per capita income from 1996 to 2000 the per capita income levels of various regions in china have also been forecasted by using adaptive control algorithms to depict an acceptable level of income inequality for policy making

are external shocks responsible for the instability of output in low income countries external shocks such as commodity price fluctuations natural disasters and the role of the international economy are often blamed for the poor economic performance of low income countries the author quantifies the impact of these different external shocks using a panel vector autoregression var approach and compares their relative contributions to output volatility in low income countries vis a vis internal factors he finds that external shocks can only explain a small fraction of the output variance of a typical low income country internal factors are the main source of fluctuations from a quantitative perspective the output effect of external shocks is typically small in absolute terms but significant relative to the historic performance of these countries

learning large deviations and recurrent currency crises this article studies a version of obstfeld s journal of international economics 43 1997 61 77 escape clause model the model is calibrated to produce three rational expectations equilibria two of these equilibria are e stable and one is unstable dynamics are introduced by assuming that agents must learn about the government s decision rule it is assumed they do this using a stochastic approximation algorithm it turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small the algorithm converges to a small noise diffusion process the dynamics of exchange rate changes are then characterized using large deviation techniques from freidlin and wentzell random perturbations of dynamical systems second edition berlin springer verlag 1998 these methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two state markov switching process where the two states correspond to the two e stable equilibria the model is calibrated to the exchange rate histories of argentina brazil and mexico currency crises in these countries resemble the predicted escape routes of the model a key feature of these escape routes is that expectations of a devaluation erupt suddenly without large contemporaneous shocks this is consistent with evidence showing that crises are often poorly anticipated by financial markets

gold monetization and gold discipline gold and its price have emerged as frequent topics of both academic and government debate 2 public attention focused on the gold market since gold s price began fluctuating violently in 1980 and 1981 has turned to gold as a possible means of removing some discretion inherent in the current fiat money system since lack of adherence to monetary rules can lead to problems of dynamic policy inconsistency academic economists have begun seriously to reconsider monetary standards based either on gold or on some other commodity as politically feasible methods of establishing rules 3

international commodity agreements an obituary notice abstract it is widely believed that international commodity agreements have lapsed because they have failed the reality is more complex the tin agreement did collapse but for sugar and cocoa adverse market conditions and lack of general support made stabilization impractical control of the coffee market ceased largely because of disagreements both between and within the producing countries on the division of the benefits resulting from higher prices overall commodity control fits uneasily in an increasingly globalized and competitive world and this perception has resulted in a diminished willingness to resolve the practical difficulties of price stabilization

reserve accumulation and financial crises from individual protection to systemic risk abstract this paper provides a new perspective on the relationship between countries international reserve holdings and financial crises while the local view holds that reserves may prevent domestic crises it overlooks that the accumulation of reserves relaxes the financing constraint of the reserve currency country and may cause a financial crisis in the centre which is transmitted globally according to this global view reserve accumulation might destabilize the international financial system since the crisis affects all countries alike the accumulation of reserves imposes a negative externality on non accumulating countries we integrate this idea in a theoretical model of the optimal amount of reserves and illustrate the gap between local and global optimality the consideration of systemic risk lowers the demand for reserves moreover if a supranational authority determines the optimal level of reserves it internalizes the negative externality and accumulates fewer reserves a macroprudential tax on reserve hoardings might implement the socially optimal solution our calibration analysis shows that these considerations are economically significant they lower the optimal amount of reserves in the benchmark case by 45

structural adjustment policies in developing economies this paper examines structural adjustment policies in ldcs defined as policy responses to external or internal shocks that are carried out with the objective of regaining the pre shock growth path the introductory section of the paper reports on policy experience that indicates that countries applying an outward oriented development strategy were better able to cope with external shocks than economies following an inward oriented strategy it is further shown that the adoption of realistic exchange rates and interest rates the avoidance of large budget deficits and the productive use of the proceeds of foreign borrowing eased the process of adjustment the paper examines in detail the elements of a policy package that may be applied in response to external or internal shocks in the case prevalent in developing economies when optimal policies are not applied thus the recommendations simultaneously aim at responding to shocks and undertaking incentives incentives to save and to invest the choice of public investments sectoral policies in energy and agriculture budgetary policies and monetary policies in the conclusions the interdependence of the various policy measures is indicated with further attention given to foreign borrowing

on the design of contingent capital with a market trigger contingent capital cc which intends to internalize the costs of too big to fail in the capital structure of large banks has been under intense debate by policy makers and academics we show that cc with a market trigger in which direct stake holders are unable to choose optimal conversion policies does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante the no value transfer restriction precludes penalizing bank managers for taking excessive risk multiplicity or absence of an equilibrium introduces the potential for price uncertainty market manipulation inecient capital allocation and frequent conversion errors these results point to the need to explore alternative designs of a prudential capital structure for banks jel classication

compensatory aid and debt relief a case study of uganda abstract we propose a contingency financing framework to assist low income countries in the achievement of debt sustainability the framework relies on an accounting method to quantify external shocks to the balance of payments and provides compensatory financing to offset their impact we apply the framework to the case of uganda during the period 1988 2002 and find that it would have been highly effective in identifying and offsetting the adverse liquidity implications of shocks to the country s trade balance

terms of trade shocks in africa are they short lived or long lived abstract this paper examines the persistence of shocks to the terms of trade using annual data on 42 sub saharan african countries for the period 1960 96 instead of using unit root tests to distinguish between stationary and random walk processes for the terms of trade this paper characterizes the persistence of shocks using point and interval estimates of the half lives of terms of trade shocks using median unbiased mu estimation techniques that remove the downward bias of standard least squares ls estimators we find that the cross country average of the half lives of terms of trade shocks is about 6 years it is also found that the estimated persistence of african terms of trade shocks varies widely for about one half of the countries their half lives are short lived less than 4 years while for one third of the countries their half lives are long lived permanent the majority of african countries are found to have terms of trade that typically experience finitely persistent transitory shocks which is consistent with the reversion of terms of trade to their long run trends

limited contract enforcement and strategic renegotiation this paper presents a strategic theory of contract renegotiation in this theory suboptimal contracts are put in place initially to protect one party against undesirable a ctions by another party and are renegotiated once the danger is past the authors develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes so that only a complicated contract or renegotiation will serve unlike most previous accounts of contract renegotiation this theory does not rely on exogenous uncertainty to motivate renegotiation copyright 1988 by american economic association

coco issuance and bank fragility abstract the promise of contingent convertible capital securities cocos as a bail in solution has been the subject of considerable theoretical analysis and debate but little is known about their effects in practice we undertake the first comprehensive empirical analysis of bank coco issues a market segment that comprises over 730 instruments totaling 521 billion four main findings emerge 1 the propensity to issue a coco is higher for larger and better capitalized banks 2 coco issues result in a statistically significant decline in issuers cds spread indicating that they generate risk reduction benefits and lower costs of debt this is especially true for cocos that convert into equity have mechanical triggers and are classified as additional tier 1 instruments 3 cocos with only discretionary triggers do not have a significant impact on cds spreads and 4 coco issues have no statistically significant impact on stock prices except for principal write down cocos with a high trigger level which have a positive effect

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

on equilibrium when contingent capital has a market trigger a correction to sundaresan and wang journal of finance 2015 this paper identifies an error in sundaresan and wang 2015 hereafter sw that invalidates its theorem 1 the paper develops a model of contingent capital cc with a stock price trigger that is consistent with sw s framework and yields closed form solutions for stock and cc prices yet the model shows that unique stock price equilibria exist for a broader range of cc contractual terms than those required by sw specifically when conversion terms benefit cc investors and penalize shareholders a unique equilibrium can exist rather than the multiple equilibria stated in sw

the international monetary system forty years after bretton woods review essay in may 1984 a distinguished group of central bankers and economists gathered for a conference at bretton woods to consider the evolution of the world monetary system that was born at that location forty years earlier this volume contains nine essays with accompanying discussion on issues of performance and reform of current international monetary arrangements these papers deal with problems facing the industrialized and the lessdeveloped countries and assess the institutions that have been set up to accommodate these problems the major accomplishments of the original bretton woods conference were of course the establishment of the system of payments based on fixed exchange rates and the organization of the world bank and the international monetary fund as the order developed in the late 40 s and early 50 s each central bank saw it as its duty to intervene in foreign exchange markets to ensure an essentially fixed parity of their currency with respect to the dollar the role of the u s was to guarantee the dollar price of gold at 35 an ounce the system has been called a dollar standard because the dollar played the role of a reserve currency one of the paradoxes of the system as robert triffin pointed out in the early 60 s is that in order to produce a continuing and rapid enough expansion of world reserves the u s had to run balance of payments deficits yet continued deficits by the u s threatened the convertibility of the dollar into gold as it happened the system of fixed parities broke down in the early 70 s not because of a lack of reserves but because a glut of dollars made the bretton woods dollar exchange rates untenable the system eventually evolved into one in which most of the industrialized countries currencies more or less are determined by the market while the currencies of most second and third world countries are pegged to a major currency the floating period has been

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

contingent convertibles with stock price triggers the case of perpetuities initial proposals for contingent convertibles cocos envisioned that these bonds would convert to equity when the issuing bank s stock price declined to a prespecified trigger subsequent research has claimed that doing so causes the stock price to have multiple equilibria or no equilibrium we show that when cocos are perpetuities which characterizes most actual cocos a unique stock price equilibrium exists except under unrealistic conditions unique equilibria occur when conversion favors or disfavors coco investors when cocos convert to equity or are written down and when cocos are callable we also analyze a bank s risk choices before and after conversion received november 29 2016 editorial decision july 15 2018 by editor itay goldstein

interprovincial disparities in china output and consumption 1952 1987 the flood of economic information from china in recent years has permitted reassessment of the chinese model of development and the extent to which china s own development experience has conformed to it the prevailing consensus of the 1970s concerning the substance of the model itself typically characterized in terms of the chinese leadership s objectives and priorities and its strategy for pursuing them has stood up quite well the same cannot be said about past appraisals of the extent to which china s economic reality has been reshaped to accord with the model s prescriptions one of the most widely remarked elements of the chinese model is the high priority assigned to regional objectives and more specifically to balance in the distribution of productive capacity and equity in the distribution of income and hence consumption during the maoist era i e prior to 1979 the central government pursued regional objectives through such measures as interregional transfers of investment resources effected via the planning system subsidization of health and education expenditures in poor regions and attempts to maintain a safety net of state relief effected largely via control of grain surpluses in short there is little doubt that prior to 1979 the chinese leadership placed an unusually high value on the spread of modern growth and the improvements in welfare associated with it and persistently acted to limit the emergence or widening of interregional disparities although china s post mao leaders have shown greater concern with efficiency and with the potential trade offs between efficiency and such goals as balance and equity their continuation of many redistributive policies indicates that they have not abandoned regional objectives but how successful has china been in achieving these objectives

aid and performance a reassessment two visions of aid effectiveness and allocation are compared the first corresponding to the new aid paradigm argues that aid is only effective if domestic policies are appropriate the second in contrast argues that aid effectiveness depends on the external and climatic environment the worse this environment or the more vulnerable the recipient countries the greater the effectiveness of aid cross sectional econometric tests related to gdp growth on two 12 year pooled periods clearly favour the second view the two views can be reconciled through the principle of performance based aid allocation where performance is defined as outcomes adjusted for the impact of environmental factors performance can then be measured in several manners which are subject to comparison one approach would lead one to allocate more aid the worse the external environment is for a given policy and the better the policy is for a given environment