modelling real interest rates abstract in this paper we model real interest rates as a generalised mean reverting ornstein uhlenbeck process empirical tests of the model using us and uk data for the period 1870 1975 shows that there exists significant mean reversion in both the us and uk for real interest rates inflation rates and nominal interest rates we present evidence for some stylised empirical facts which might be incorporated in models linking real interest rates inflation and nominal interest rates

firm optimism and pessimism abstract this paper explores the question of whether firms have systematic expectation biases using microdata from the west german manufacturing subset of the ifo business climate survey we infer quarterly production growth rates at the firm level we then combine this information with production growth expectations over a quarterly horizon to construct quantitative firm specific expectation errors our findings show that at most one third of our firms systematically over or underpredict their production growth one quarter ahead our findings further show that larger and exporting firms tend to have more realistic expectations while firms with higher leverage are more prone to expectations that are biased towards optimism

default risk and risk averse international investors abstract this paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion dara by incorporating risk averse investors who trade with an emerging economy the present model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets than the standard model with risk neutral investors the paper shows that if investors have dara preferences then the emerging economy s default risk capital flows and bond prices are a function not only of the fundamentals of the economy but also of the level of financial wealth and risk aversion of international investors in particular as investors become wealthier or less risk averse the emerging economy becomes less credit constrained as a result the emerging economy s default risk is lower and its bond prices and capital inflows are higher additionally with risk averse investors the risk premium in the asset prices of the sovereign countries can be decomposed into two components a base premium that compensates the investors for the probability of default and an excess premium that compensates them for taking the risk of default

the sources of sovereign risk a calibration based on levy stochastic processes abstract governments choose to issue risky or riskless debt depending on the nature of the stochastic process of output we use brownian motion and poisson shocks a modeling method in the literature on corporate default known as levy processes to approximate a decomposition of the output process into a smooth and a jump component using an eaton and gersovitz 1981 model of debt repudiation we show that the brownian part explains the counter cyclical behavior of the current account and the poisson part explains the risk of default thus enabling our model to account for key stylized facts regarding sovereign risk

interest rates and inflation a continuous time stochastic approach abstract this paper investigates the theoretical foundations of fisher s equation which expresses the nominal interest rate as the sum of the real interest rate and the expected rate of inflation to emphasize fisher s 1930 original formulation and sargent s 1973 recent suggestion that nominal interest rates and inflation are simultaneously determined rather than having the causation go from inflation to interest rates we develop a two equation continuous time stochastic model to build a more solid theoretical foundation of fisher s equation assuming that the nominal interest rate and the rate of inflation follow ito processes we derive an ito equation that allows us to express and compute the expected real interest rate and its volatility these two equations generalize the traditional fisher equation and an illustration using us long data from 1865 1972 shows the usefulness of our results

sovereign debt as a contingent claim a quantitative approach abstract we construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt in the model benefits of defaulting are tempered by higher future interest rates for a wide set of parameters the only equilibrium is one in which the sovereign defaults in all states additional output losses however sustain equilibria that resemble the data we show that due to the adverse selection problem some countries choose to delay default to reduce loss of reputation moreover although equilibria with no default imply greater welfare levels they are not sustainable in highly indebted and volatile countries

fisher s relationship in a volatile world a note on malliaris and malliaris abstract this paper characterises the particular circumstances in which a model consisting of diffusion processes for a nominal asset and the price level yields fisher s relationship for the real rate of interest

the dynamics of sovereign default risk and political turnover abstract this paper develops a stochastic dynamic politico economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt electoral outcomes are characterized by the economic benefits from the incumbent s policies and stochastic idiosyncratic ideological aspects quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties prior to a debt crisis the incumbent government accumulates external debt to foster the probability of remaining in power the dynamic interaction of electoral outcomes external debt and sovereign default supports arguments for imposing institutional constraints on incumbent governments

can firms see into the future survey evidence from germany abstract this paper presents new evidence on the expectation formation process of firms from a survey of the german manufacturing sector first firms become too optimistic after their business has improved consistent with the over extrapolation of their experience second firms extrapolate improvements in their business more than deteriorations third firms are more optimistic pessimistic than usual during business cycle peaks troughs suggesting that they do not anticipate reversals fourth the german reunification provided a positive exogenous shock to the business of west german products the industries most positively affected by the shock initially over extrapolated the past downward trend just as much as the less affected industries and thus failed to anticipate the reversal fifth more overoptimistic firms subsequently report larger inventories and lower profits suggesting that expectation errors entail opportunity costs sixth older and larger firms show a smaller extrapolation bias indicating that time and resources can alleviate the extrapolation bias seventh firms that expect their business to improve tend to also expect their prices to increase suggesting that firms mostly try to forecast demand shocks as opposed to supply shocks overall these observations suggest that firms have a limited ability to anticipate changes in their activity and extrapolate their experience too much

external debt capital flight and political risk abstract this paper explains the simultaneous occurence of large external debts private capital outflows and low domestic capital formation we consider a general equilibrium model in which two government types with conflicting distributional goals randomly alternate in office uncertainty over the fiscal policies of future governments generates capital flight and small domestic investment and induces the government to overaccumulate external debt the model also predicts that left wing governments are more inclined to restrict capital outflows than right wing governments finally we examine how political uncertainty affects the risk premium and how debt repudiation may occur after a regime change

sovereign debt sustainability in advanced economies we develop a measure of maximum sustainable government debt for advanced economies how much investors are willing to lend to a country s government depends on the country s expected primary surplus the level and volatility of its rate of growth and how much debt the government expects to be able to raise in the future for the purpose of servicing the debt it seeks to raise today we provide a simple formula that computes a country s maximum sustainable debt msd as a function of four easy to estimate parameters we further compute a country s theoretical probability of default pd as a function of its debt to gdp ratio we nally calibrate our measures for 23 oecd countries and test the relation between sovereign yield spreads and our theoretical pd at prevailing debt levels we nd it to be strongly statistically signicant jel h63

business cycle dynamics under rational inattention we develop a dynamic stochastic general equilibrium dsge model with rational inattention and compare its predictions to data households and decision makers in firms have limited attention and optimally allocate their attention rational inattention is the only source of slow adjustment the model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks at the same time profit losses and utility losses from inattention are very small furthermore it matters whether one uses this model or a conventional dsge model for policy analysis

sovereign and private default risks over the business cycle abstract sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector in a sample of emerging economies we find that both sovereign and private interest rate spreads are countercyclical this paper presents a model of a small open economy that accounts for these empirical regularities it includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic productivity risk and a government which borrows internationally and taxes firms to finance public expenditures the model gives rise to endogenous private and sovereign interest rate spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks

information rigidity and the expectations formation process a simple framework and new facts we propose a new approach to test the full information rational expectations hypothesis which can identify whether rejections of the null arise from irrationality or limited information this approach quantifies the economic significance of departures from the null by quantifying the underlying degree of information rigidity applying this approach to u s and international data of professional forecasters and other agents yields pervasive evidence consistent with models of imperfect information furthermore the proposed approach sheds new light on policies such as inflation targeting and those leading to the great moderation affecting expectations finally we document evidence of state dependence in the expectations formation process

how do firms form their expectations new survey evidence author s coibion o gorodnichenko y kumar s abstract 2018 american economic association all rights reserved we survey new zealand firms and document novel facts about their macroeconomic beliefs there is widespread dispersion in beliefs about past and future macroeconomic conditions especially inflation this dispersion in beliefs is consistent with firms incentives to collect and process information using experimental methods we find that firms update their beliefs in a bayesian manner when presented with new information about the economy and that changes in their beliefs affect their decisions inflation is not generally perceived as being important to business decisions so firms devote few resources to collecting and processing information about inflation

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

debt dilution and sovereign default risk we measure the effects of debt dilution on sovereign default risk and study debt covenants that could mitigate these effects we calibrate a baseline model with endogenous debt duration and default risk in which debt can be diluted using data from spain we find that debt dilution accounts for 78 percent of the default risk in the baseline economy and that eliminating dilution increases the optimal duration of sovereign debt by almost 2 years eliminating dilution also increases consumption volatility but still produces welfare gains the debt covenants we study could help enforcing fiscal rules

the power of forward guidance revisited in recent years central banks have increasingly turned to forward guidance as a central tool of monetary policy especially as interest rates around the world have hit the zero lower bound standard monetary models imply that far future forward guidance is extremely powerful promises about far future interest rates have huge effects on current economic outcomes and these effects grow with the horizon of the forward guidance we show that the power of forward guidance is highly sensitive to the assumption of complete markets if agents face uninsurable income risk and borrowing constraints a precautionary savings effect tempers their responses to changes in future interest rates as a consequence forward guidance has substantially less power to stimulate the economy in addition we show that the business cycle dynamics of our incomplete markets model differ substantially from its complete market counterpart this contrasts with the well known results of krusell and smith 1998 we present approximate representations that can easily be incorporated into standard business cycle models

inflation and output in new keynesian models with a transient interest rate peg a familiar result in the canonical dynamic new keynesian dnk model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding we examine a general class of interest rate pegs in a variety of dnk models standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg this unusual behavior does not arise in sticky information models of the phillips curve

politics and perceived country creditworthiness in international banking this paper marks a departure from most previous studies of country creditworthiness in international banking because it incorporates systematically generated quantitative indicators of political instability in the analysis the authors empirically test for the effects of political instability on perceived country creditworthiness using data on thirty heavily indebted developing countries for the period 1967 86 in addition to economic factors they examine the effects of three types of political instability regime change political legitimacy and armed conflict the authors also distinguish between proximate instability and chronic instability they find significant effects of proximate instability particularly in governmental regime on indicators of countries perceived creditworthiness copyright 1990 by ohio state university press

repatriation of debt in the euro crisis with the beginning of the euro crisis the long standing trend of european financial integration reversed investors unwound cross border positions of debt obligations and increased holdings of locally issued debt in other words debt obligations were repatriated we use data on bank portfolios to document three new empirical regularities of the financial disintegration i repatriation affected mainly debt of crisis countries ii repatriation affected mainly public debt iii the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the euro area we read these results in light of standard theories of cross border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt

monetary policy announcements and expectations evidence from german firms abstract we assess empirically whether monetary policy announcements impact firm expectations two features of our data set are key first we rely on a survey of production and price expectations of german firms that is expectations of actual price setters second we observe the day on which firms submit their answers to the survey we compare the responses of firms before and after monetary policy surprises and obtain two results first firm expectations respond to policy surprises second the response becomes weaker as the surprise becomes bigger a contractionary surprise of moderate size reduces firm expectations while a moderate expansionary surprise raises them large surprises both negative and positive fail to alter expectations consistent with this result we find that many of the ecb s announcements of non conventional policies did not affect expectations significantly overall our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise

sovereign debt optimal contract underinvestment and forgiveness in this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank the loan contract specifies both the amount of the loan and the promised interest payments and rationally reflects the investment decisions of the country and the possibilities of renegotiation and repudiation of the debt an important feature of the model is that at the initial negotiation of the loan there is uncertainty about whether the country will renegotiate for partial forgiveness in the future and whether it will eventually repudiate the debt even having successfully renegotiated moreover the probabilities of renegotiation and repudiation and the amount of possible forgiveness are endogenously determined in the model the repudiation decision is directly related to the underinvestment problem the objective of the renegotiation is precisely to alleviate this problem the model is used to analyze the effects of four variables on both the optimal contract and the country s welfare the degree of penalties that a bank can impose on a defaulting country the uncertainty of production the productivity of investments and the riskless interest rate the analysis has policy implications as well as testable predictions during the last ten years the issues related to less developed countries ldcs debt have become increasingly more important in the world economy the main reason for this is the significant increase in the amount of debt outstanding and the consequent higher yearly interest payments by 1988 seventeen highly indebted countries had an aggregated debt of 510 billion dollars see rogoff 1990 a second important reason is that starting in 1982 some of these countries suspended debt service payments creating a serious crisis of confidence in the banking system of the lending countries as a consequence borrowers and lenders have had to engage in negotiations including the rescheduling of the repayments and possibly partial forgiveness a number of papers have suggested that forgiveness could conceivably make both lenders and borrowers better off because the country

the high frequency response of the eur usd exchange rate to ecb communication we investigate the impact of the european central bank s monetary policy communication during the press conference held after the monthly governing council meeting on the eur usd exchange rate in high frequency based on the method of content analysis we construct communication indicators for the introductory statement and find that communication with respect to future price developments is most relevant in response to statements about increasing risks to price stability the eur appreciates on impact to the contrary communication about economic activity and monetary aggregates does not generate significant exchange rate reactions

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

welfare gains of bailouts in a sovereign default model abstract we examine the welfare effects of bailouts in economies exposed to sovereign default risk when a government of a small open economy requests a bailout from an international financial institution it receives a non defaultable loan of size g that comes with imposed debt limits the government endogenously asks for the bailout during recessions and repays it when the economy recovers hence the bailout acts as an imperfect state contingent asset that makes the economy better off the bailout duration is endogenous and increases with its size the bailout size creates non trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand and facing longer lasting financial constraints and accumulated interest payments on the other hand we characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump shaped in the size of bailout loans

high yields the spread on german interest rates this paper is a first attempt at evaluating the determinants of the interest rate differentials on government bonds between high yielders namely italy spain and sweden and germany in particular we concentrate on daily frequencies where the relevance of economic fundamentals is rather limited and address the question of the relative importance of local and global factors in the determination of such spread we identify and measure three components of total yield differentials one due to expectations of exchange rate depreciation which we call the exchange rate factor another which reflects the market assessment of default risk and a last one due to the different taxation treatment of long term yields

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

the political economy of sovereign defaults abstract how do income distribution and the tax system affect sovereign borrowing and default decisions are these effects shaped by the political constraints that governments face when raising revenues to repay the debt to address these questions we incorporate agent heterogeneity in terms of income distribution and tax burden and a political support constraint into a standard dsge model of sovereign default the results show that income inequality and regressive taxes make defaults more likely for a given level of debt while they reduce sovereign borrowing in equilibrium tighter political support requirements reinforce these effects

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

high frequency identification of monetary non neutrality the information effect we present estimates of monetary non neutrality based on evidence from high frequency responses of real interest rates expected inflation and expected output growth our identifying assumption is that unexpected changes in interest rates in a 30 minute window surrounding scheduled federal reserve announcements arise from news about monetary policy in response to an interest rate hike nominal and real interest rates increase roughly one for one several years out into the term structure while the response of expected inflation is small at the same time forecasts about output growth also increase the opposite of what standard models imply about a monetary tightening to explain these facts we build a model in which fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output

comments on monetary policy announcements and expectations evidence from german firms abstract enders et al 2019b find that small expansionary monetary policy surprises lead to increases in firms price and production expectations vice versa for small contractionary monetary surprises for larger monetary surprises of either direction the reaction of price and production expectations tends to be dampened back to zero this finding is explained with a differential size dependent mix in monetary policy surprises as regards their actual monetary policy content and their delphic information content about how the monetary authority views the state of the economy policy conclusions from this result for the conduct of monetary policy and its communication are discussed

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

welfare analysis of currency regimes with defaultable debts abstract we modify the cole and kehoe model by including domestic debt according to the original model a speculative attack on a high debt level issued abroad triggers external debt default here it is possible to inflate away the domestic debt to avoid the external debt default we consider two possibilities for domestic debt denomination i local currency and ii common currency in the second case inflation depends on a monetary union decision our numerical results show that to have a debt share denominated in a common currency is optimal when the refinancing risks are highly correlated across union members otherwise the best is to keep the domestic debt denominated in local currency finally the extreme case of having all debt issued abroad and denominated in a foreign currency is suitable when under alternative regimes suboptimal inflation motivated by political factors is likely although the paper was originally developed for emerging market economies it sheds some light on the recent eurozone crisis

asset backed contracts and sovereign risk abstract a fundamental problem with sovereign default is the lack of a legal enforcement mechanism since the 1920s there have been an ongoing set of initiatives undertaken by the league of nations and the unctad to set international laws on borrowing and lending standards all of which have failed to address the unenforceability problem this paper proposes to use asset backed contracts where the usufruct of the asset transfers to the asset holder unlike conventional sovereign borrowing there are international laws governing asset backed contracts which allow the international assets of a country to be seized this paper exemplifies on the idea that asset backed contracts which are also widely practiced in islamic finance can provide a solution to unenforceable sovereign debt contracts the paper focuses specifically on argentina which has defaulted twice in 13 years if argentina had utilized asset backed contracts prior to its 2001 debt default it would have gained from the following advantages higher debt to gdp ratios larger welfare gains lower probability of default and thus lower borrowing costs

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

time varying business volatility and the price setting of firms abstract does time varying business uncertainty volatility affect the price setting of firms and in what way we estimate from the micro data of the german ifo business climate survey the impact of idiosyncratic volatility on the extensive margin of firm level price setting behavior heightened uncertainty increases the probability of a price change suggesting that for price setting the volatility effect dominates the wait and see effect in a second step we use structural vector autoregressions to estimate the effects of uncertainty on the intensive pricing margin higher uncertainty leads to an increase in price dispersion and to larger price adjustments

debt arrears in latin america do political variables matter political instability and debt problems characterise latin america in the last two decades this article estimated a logit model of debt arrears including economic as well as political variables our results suggested that both economic and political indicators affected debt repayment in latin america during 1971 86 we also cast a shadow on the viewpoint that authoritarian and military regimes have an advantage over democratically elected governments with regard to debt related issues

consumption savings decisions with quasi geometric discounting we study the consumption savings problem of an infinitely lived rational consumer who has time inconsistent preferences in the form of quasi geometric discounting the consumer operates a weakly concave production function and must simply divide current resources into current consumption and savings there is no uncertainty a solution to the consumer s problem is a subgame perfect equilibrium of a dynamic game between the consumer s successive selves we show that this game has a continuum of equilibria in stationary markov strategies not only is the stationary point of the consumer s asset holdings indeterminate but each stationary point has a continuum of dynamic paths converging to it the savings policy rules underlying these dynamic paths are step functions

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

time varying volatility default and the sovereign risk premium this paper studies how changes in the volatility of aggregate income aect the sovereign spread i document a positive correlation between sovereign spreads and aggregate income volatility for a set of european economies then i propose a model with endogenous sovereign spread and time varying volatility to understand this fact i nd that volatility changes aect savings and the sovereign spread however the impact of volatility shocks is state dependent when the economy is relatively rich an increase in volatility generates precautionary savings instead when the economy is relatively poor an increase in volatility induces an increase in foreign debt and a higher spread this mechanism is absent in standard business cycle models and only appears because of the default option moreover this mechanism can generate a substantial variability of spreads only due to volatility shocks in this way the model is able to rationalize the positive correlation between sovereign spreads and volatility observed in the data

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

the dynamics of government abstract we model income redistribution with dynamic distortions as determined by rational voting without commitment among individuals of different types and income realizations we find that redistribution is too persistent relative to that chosen by a planner with commitment the difference is larger the lower is the political influence of young agents the lower is the altruistic concern for future generations and the lower is risk aversion furthermore there tends to be too much redistribution in the political equilibrium finally smooth preference aggregation as under probabilistic voting produces less persistence and does not admit multiple equilibria which occur under majority voting aggregation

heterogeneous borrowers in quantitative models of sovereign default we extend the model used in recent quantitative studies of sovereign default allowing policymakers of different types to stochastically alternate in power we show that a default episode may be triggered by a change in the type of policymaker in office and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions under high political stability political turnover enables the model to generate a weaker correlation between economic conditions and default decisions a higher and more volatile spread and lower borrowing levels after a default episode

the effectiveness of non standard monetary policy measures evidence from survey data we assess the perception of professional forecasters regarding the effectiveness of unconventionalmonetary policy measures undertaken by the u s federal reserve after the collapse of lehmanbrothers using individual survey data we analyse the changes in forecasting of bond yields aroundthe announcement and implementation dates of non standard monetary policies the resultsindicate that bond yields are expected to drop significantly for at least one year after theannouncement and the implementation of accommodative policies

long duration bonds and sovereign defaults abstract this paper extends the baseline framework used in recent quantitative studies of sovereign default by assuming that the government can borrow using long duration bonds this contrasts with previous studies which assume the government can borrow using bonds that mature after one quarter we show that when we assume that the government issues bonds with a duration similar to the average duration of sovereign bonds in emerging economies the model generates an interest rate that is substantially higher and more volatile than the one obtained assuming one quarter bonds this narrows the gap between the predictions of the model and the data which indicates that the introduction of long duration bonds may be a useful tool for future research about emerging economies our analysis is also relevant for the study of other credit markets

income inequality and sovereign default abstract in this paper we study how income inequality matters for government borrowing and default decisions we extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income we calibrate the model to match a number of stylized facts for argentina we show that i rising income inequality within a country increases the probability of default significantly ii the effect of output shocks is larger than the effect of inequality shocks iii the joint effect of these two shocks can generate a high default probability consistent with the argentine data iv the model can match the high volatility of consumption by the poor relative to the rich and v more progressive income taxes lead to lower default risk

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8

sovereign default interest rates and political uncertainty in emerging markets abstract a large body of the empirical literature shows that high turnover rates length of tenure of policymakers and the degree of conflict within a country affects sovereign spreads debt and default rates we help to rationalize such claims by including these political features in a dynamic stochastic small open economy model of sovereign debt and default in this way we offer a complementary approach to the econometric analyses in the literature consistent with the data the quantitative analysis shows that politically unstable and more polarized economies experience higher default rates and larger level and volatility of sovereign interest rate spreads

why are there serial defaulters evidence from constitutions abstract presidential democracies were 4 9 times more likely than parliamentary democracies to default on external debts between 1976 and 2000 in this article i argue that the explanation for the serial defaults by a number of sovereign borrowers lies in their constitutions ceteris paribus parliamentary democracies are less likely than presidential democracies to default on their liabilities because the confidence requirement creates a credible link between economic policies and the executive s political survival this link tends to strengthen the repayment commitment when politicians are opportunistic i show that this effect is large in the contemporary world even when the comparison is restricted to countries that are similar in terms of colonial origin geography and economic variables since a country s form of government is typically chosen at the time of independence and is highly persistent over time constitutions can explain why debt policies in developing countries are related to individual