sovereign default risk and volatility abstract in a model of sovereign debt with endogenous default we find a non monotonic relationship between default risk and volatility reflecting a trade off between prudence and the insurance value of default we show that this feature also holds in the data

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

news and sovereign default risk in small open economies this paper builds a unified model of sovereign debt default risk and news shocks news shocks improve the quantitative performance of the sovereign default model in a number of empirically relevant dimensions first with news shocks not all defaults occur during downturns second the news shocks help account for key differences between developing and more developed economies as the precision of news improves the model predicts lower variability of consumption less countercyclical trade balance and interest rate spreads as well as a higher level of debt in line with more developed economies third the model captures the hump shaped relationship between default rates and the precision of news obtained from the data finally the news shocks have a nonmonotonic effect on welfare

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

optimal environmental road pricing abstract an optimal first best road charge should not only be differentiated with respect to factors that affect the direct external environmental and time costs from the road user himself indirect effects such as the fact that others cars will be more polluting when congestion increases should also be taken into account

coase versus pacman who eats whom in the durable goods monopoly in standard durable goods monopoly models both the set of buyers and the set of prices are assumed to be continua if the set of buyers is finite the perfectly discriminating monopoly outcome is a unique subgame perfect equilibrium when the seller is sufficiently patient introducing instead a smallest unit of account yields the coasian outcome as a generically unique subgame perfect equilibrium for patient enough buyers a folk theorem is obtained if both sets are finite these results reflect a strategic disadvantage of having to make moves with a large impact on other players payoffs the analysis is extended to durable goods oligopoly

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

a quantitative model of sovereign debt bailouts and conditionality in times of sovereign debt crises international financial institutions provide temporary financial support contingent on the implementation of specific macroeconomic policies this paper develops a model of sovereign debt and default with endogenous participation rates in bailout programs conditionality enters as a constraint on fiscal policy in the model the insurance character of bailouts generates incentives for debt accumulation quantitative results suggest that bailouts prevent sovereign defaults in the short run but may come at a cost of a greater default probability in the long run increasing the intensity of conditionality lowers the bailout participation rate and generates a hump shaped pattern of sovereign default risk

the invisible hand and externalities when economists contemplate the invisible hand at work they generally think of competitive markets but there are some circumstances in which markets are not supposed to operate well i e in which the invisible hand is thought to falter a leading cause of market failure many argue is the presence of significant externalities with such externalities the first welfare theorem does not apply and so competitive equilibrium if it exists at all is not typically pareto optimal in the tradition of a c pigou 1932 the typical response to this lack of optimality is for the government to step in and introduce corrective policy usually in the form of taxes or subsidies there is of course a strong antipigouvian tradition as well specifically proponents of the coase theorem ronald coase 1960 have contended that despite externalities unrestrained bargaining and contracting ought to be sufficient to generate an efficient outcome indeed coase s own celebrated example was a case of externalities thus even if formal markets themselves fail the invisible hand nevertheless succeeds and outside intervention or design is not required recently joseph farrell 1987 argued that even when free bargaining is permitted the laissez faire conclusion inherent in the coase theorem may founder if agents have incomplete information about one another s relevant characteristics i shall show however that the problem that farrell identified is due only to monopoly power and is not peculiar to externalities indeed in this paper i shall take a modified coasian stance i shall attempt to show that in spite of externalities and incomplete information private contractual agreements suffice to achieve efficiency as long as no agent is big enough to have significant market power this conclusion must be qualified however with the proviso that if the externality is nonexcludable i e no one can be excluded from its effects the government must intervene to prevent free riding on the agreements intervention in this case amounts to establishing the right of an agent providing a positive external effect to collect a fee for increasing the effect from all who enjoy it even if they are not parties to a contract with the provider symmetrically providers of a negative externality can collect a fee for diminishing the effect from all their victims in either case however the fee is set endogenously that is it is determined by the contractual arrangements rather than by the government this result for nonexcludable externalities which include pure public goods provides support for a fairly laissez faire stance toward externalities but turns on an important assumption namely that parties always write contracts so as to maximize their social surplus subject to incentive and individual rationality constraints i will return to this assumption in the final section

the optimum quantity of debt abstract we find that the welfare gains to being at the optimum quantity of debt rather than the current us level are small and therefore concerns regarding the high level of debt in the us economy may be misplaced this finding is based on a model of a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints this model incorporates a different role for government debt than is found in standard models and it captures different cost benefit trade offs on the benefit side government debt enhances the liquidity of households by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints on the cost side the implied taxes have adverse wealth distribution and incentive effects in addition government debt crowds out capital via higher interest rates and lowers per capita consumption

default settlement and signalling lending resumption in a reputational model of sovereign debt this paper develops a simple model of sovereign debt in which defaulting nations are excluded from capital markets and regain access by making partial repayments this implication of the model is consistent with the historical evidence that defaulting countries return to international loan markets soon after a settlement but after varying periods of exclusion copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

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

pricing and congestion economic principles relevant to pricing roads u k expenditures on roads or road costs average l4 34 billion per year from the 24 6 million vehicles registered road taxes of l12 7 billion were collected 2 9 times road costs from 1978 88 the average daily traffic on each km of road rose by 34 percent with a consequent serious increase in congestion road space is a valuable and scarce resource and road users should logically pay the marginal social cost if they are to make efficient transport and location decisions the paper estimates these costs and the appropriate charges for britain and identifies the major policy issues total road charges ignoring hard to quantify accident costs should yield l13 8 billion of which congestion charges would be l12 8 billion though close to road taxes in total amount replacing current taxes by road pricing would reduce congestion improve public transport and avoid perverse consequences from road expansion copyright 1990 by oxford university press

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

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

recent developments in quantitative models of sovereign default the current crisis and discussions in the euro area in particular show that sovereign debt crises defaults are no longer confined to developing economies following crises in many latin american countries the literature on quantitative dynamic macro models of sovereign default has been advancing rapidly current debate should take note of the findings of this literature an extensive overview of which has been provided in this paper this paper also discusses the inherent difficulties as well as possibilities of integrating this type of model into standard business cycle models rbc and dsge models this is likely to be particularly helpful when using models to analyse upcoming issues in the euro area such as a suitable sovereign insolvency law or the assumption of joint liability

a note on mechanization and wage bargaining abstract collective wage bargaining may bias firms choice of production techniques but not in favour of mechanization it is most profitable to install relatively more equipment which is complementary to labour power than equipment which is a substitute

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

equilibrium binding agreements abstract we study equilibrium binding agreements the coalition structures that form under such agreements and the efficiency of the outcomes that result we analyze such agreements in a context where the payoff to each player depends on the actions of all other players thus a game in strategic form is a natural starting point unlike the device of a characteristic function explicit attention is paid to the behavior of the complementary set of players when a coalition blocks a proposed agreement a solution concept and its applications are discussed journal of economic literature classification numbers c70 c71

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

welfare implications of the bankruptcy reform act of 1999 abstract in recent years personal bankruptcy has become an important issue to consumers creditors and legislators alike over 40 billion dollars of unsecured debt were discharged in 1998 by 1 44 million households these losses have led legislators to propose a variety of changes in bankruptcy law the most important and recent of which is the bankruptcy reform act of 1999 ba99 i develop a dynamic stochastic general equilibrium model of personal bankruptcy to investigate the trade off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes i find that stringent means tests would reduce filing rates only slightly and would have only modest welfare consequences on the other hand the elimination of bankruptcy altogether is found to have substantial benefits this result is robust to income shock persistence and to stringency in the application of means tests

global growth opportunities and market integration we propose an exogenous measure of a country s growth opportunities by interacting the country s local industry mix with global price to earnings pe ratios we find that these exogenous growth opportunities predict future changes in real gdp and investment in a large panel of countries this relation is strongest in countries that have liberalized their capital accounts equity markets and banking systems we also find that financial development external finance dependence and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness finally we formulate new tests of market integration and segmentation by linking local and global pe ratios to relative economic growth in a perfectly integrated world economy capital should be invested where it

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

sovereign default private sector creditors and the ifis abstract the data reveal that emerging market sovereign borrowing from international financial institutions ifis is small intermittent and countercyclical compared to that from private sector creditors the ifi loan contracts offered to sovereigns differ from the private ones in that they are more enforceable and have conditionality arrangements attached to them taking these contractual differences as given this paper builds a quantitative model of a sovereign borrower and argues that better enforceability of ifi loan contracts is the main institutional feature that explains the size and cyclicality while conditionality accounts for the intermittency of borrowing from the ifis

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

distributional incentives in an equilibrium model of domestic sovereign default the european debt crisis shares features of historical episodes of outright default on domestic public debt about which little research has been done this paper proposes a theory of domestic sovereign default in which a government chooses debt and default optimally responding to distributional incentives affecting the welfare of risk averse agents who are split into debt holders and non holders equilibria with debt do not exist if the government is utilitarian and default is costless adding exogenous default costs the model supports equilibria with debt exposed to default risk in which debt falls as the fraction of agents who own the debt falls debt can also be sustained if the government s welfare weights are biased in favor of bond holders resulting in equilibria in which debt rises as debt ownership is more concentrated these results are robust to adding a second asset opening the economy to foreign investors or introducing taxes as an alternative redistributive policy instrument

sovereign defaults information investment and credit abstract why would a sovereign government immune from bankruptcy procedures and with few assets that could be seized in the event of a default ever repay foreign creditors and correspondingly why do foreign creditors lend to sovereigns this paper finds general conditions under which even in the absence of sanctions lending to sovereigns can emerge in a single shot game furthermore it shows that positive borrowing can be sustained both in pooling and separating equilibria in this way it makes clear that neither sanctions nor reputation considerations the two classical explanations are necessary to enforce repayment information revelation is the crucial mechanism for these results the repayment default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy governments repay to affect agents expectations about them a default through its effect on expectations about fundamentals can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets governments repay to avoid these costs but may default in equilibrium when hit by a negative shock

a theory of political cycles abstract we study how the proximity of elections affects policy choices in a model in which policymakers want to improve their reputation to increase their reelection chances policymakers equilibrium decisions depend on both their reputation and the proximity of the next election typically incentives to influence election results are stronger closer to the election for a given reputation level as argued in the political cycles literature and these political cycles are less important when the policymaker s reputation is better our analysis sheds light on other agency relationships in which part of the compensation is decided upon infrequently

labor market distortions under sovereign debt default crises risk of sovereign debt default has frequently affected emerging market and developed economies such financial crisis are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model in this paper i document that a labor wedge deteriorates substantially around swift reversals of current accounts or default episodes i propose and evaluate two different explanations for these movements by linking the wedges to changes in labor taxes and in the cost of working capital with these two features included a dynamic model of equilibrium default is able to replicate the behavior of the labor wedge observed in the data around financial crisis in the model higher interest rates are propagated into larger costs of hiring labor through the presence of working capital as an economy is hit with a stream of bad productivity shocks the incentives to default become stronger thus increasing the cost of debt this reduces firm demand for labor and generates a labor wedge a similar effect is obtained with a counter cyclical tax rate policy the model is used to shed light on the recent events of the euro area debt crisis and in particular of the greek default event

ex ante implications of sovereign default i study how the possibility of default on external debts affects other capital allocation decisions in a small open economy in the model default has an option value derived from the randomization over ex post default regimes which depends on country specific productivity shocks this feature of default reduces incentives for ex ante diversification which would reduce exposure to the productivity shock as a result if the economys debt to capital ratio is allowed to cross a fixed threshold identified in the model the unique equilibrium exhibits an allocation of capital that is less productive in expectation and more volatile than in a benchmark model without default the model therefore captures a number of salient features of emerging and less developed countries where low levels of international risk sharing have gone hand in hand with frequent and recurring default events

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

endogenous political turnover and fluctuations in sovereign default risk abstract a sovereign default model in which the sovereign derives private benefits from public office and contests elections to stay in power is developed the economy s growth process is modeled as a markov switching regime which is shown to be a better description of the data for our set of emerging economies in the model consistent with evidence the sovereign is less likely to be reelected if economic growth is weak in the low growth regime there is higher probability of loss of private benefits due to turnover which makes the sovereign behave more myopically this growth linked variation in effective discount factor is shown to be important in generating volatility in sovereign spreads

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

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

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

union s threats and wage determination this paper considers local wage bargaining as a sequential game and focus es on how different rules of the game affect employment and equilibri um payment to workers and employers work to rule and other go slow t hreats lead to low employment while strike threats lead to high empl oyment an increase in the bargaining power of the union induces high er or unchanged equilibrium employment in the strike threat case whi le employment is reduced in the slow down case finally if all kinds of industrial actions are legal only one is credible which type de pends on the parameters of the model copyright 1988 by royal economic society

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

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

statistical properties of country risk ratings under oil price volatility evidence from selected oil exporting countries abstract this paper focuses on the application of panel models for identification and analysis of influence of oil price volatility on statistical properties of country risk ratings which stem from uncertainty of macroeconomic fluctuations firstly two statistical properties of country risk ratings volatility clustering and asymmetrical revision were identified in a theoretical framework based on cruces 2006 secondly considering the oil price volatility numerical experiments were conducted based on extended models to test and verify specific properties of country risk ratings in selected oil exporting countries empirical results suggest that properties of country risk remain comparatively steady despite oil price volatility it is also found that the oil price volatility can obviously exaggerate the country risk volatility as it happened during 2007 2009 country clustering based on the properties of country risk ratings shows that the selected countries maintain a significant clustering tendency these features are of great importance for estimating risk exposure of international trade and investments in oil export during extreme situations

sovereign default risk and commitment for fiscal adjustment abstract this paper studies fiscal policy in a model of sovereign debt and default a time inconsistency problem arises since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates debtor countries choose suboptimally low fiscal adjustments an international organization capable of designing a contract that coaxes debtors into a tougher fiscal stance via the provision of cheap senior lending in times of crisis can work as a commitment device and improve social welfare

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

the household bankruptcy decision personal bankruptcy filings have risen from 0 3 percent of households per year in 1984 to around 1 35 percent in 1998 and 1999 transforming bankruptcy from a rare occurrence to a routine event lenders lost about 39 billion in 1998 due to personal bankruptcy filings but economists have little understanding of why households file for bankruptcy or why filings have increased so rapidly until very recently studying the household bankruptcy decision was very difficult because no household level data set existed that included information on bankruptcy filings in this paper we use new data from the panel study of income dynamics which includes information on bankruptcy filings to estimate a model of households bankruptcy decisions we find support for the strategic model of bankruptcy which predicts that households are more likely to file when their financial benefit from filing is higher our model predicts that an increase of 1 000 in households financial benefit from bankruptcy would result in a 7 percent increase in the number of bankruptcy filings our model also predicts that if the 1997 national bankruptcy review commission s proposed changes in bankruptcy exemption levels were implemented there would be a 16 percent increase in the number of bankruptcy filings each year but if the 100 000 cap on homestead exemptions recently passed by the u s senate were adopted our model predicts that there would be only a negligible effect on the number of filings we find little support for the nonstrategic model of bankruptcy which predicts that households file when adverse events occur which reduce their ability to repay finally controlling for state and time fixed effects our model shows that households are more likely to file for bankruptcy if they live in districts with higher aggregate filing rates

efficiency and the role of default when security markets are incomplete this paper argues that default plays an important positive role in the economy if markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events contingent contracting may be severely restricted moreover opening new markets may not relieve these restrictions default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty copyright 1993 by american economic association

market power and inefficiency a contracts perspective this paper surveys the economics of market power from the perspective of contract theory various practices that might be of competition policy concern including price discrimination quantity discounts bundling vertical integration and contracts with customers are discussed in terms of constraints on profit maximization chiefly arising from incomplete information and credible commitment problems first the exploitation of pure monopoly power over final consumers or downstream firms is discussed then motives for anticompetitive behavior towards rival firms are considered including avoidance of profit dissipation extraction of rival surplus and exploitation of customer disunity copyright 1996 by oxford university press

sovereign default and capital accumulation i introduce endogenous capital accumulation into an otherwise standard quantitative sovereign default model in the tradition of eaton and gersovitz 1981 and find that conditional on a level of debt default incentives are u shaped in the capital stock the economy with too small or too large amounts of capital is likely to default in addition to an excusable motive for default in line with grossman and huyck 1989 our model also predicts an opportunistic motive for default in line with kehoe and levine 1993 the model predicts the opportunistic motive for default because 1 capital is used as a consumption insurance vehicle during autarky after default 2 installed capital within the border cannot be seized by foreign lenders and 3 our model does not use an ad hoc output cost of default which only penalizes default in high income states the two different motives for default allow the calibrated model to generate defaults in good and bad times in simulation with a frequency of 38 and 62 respectively this is consistent with tomz and wright 2007 s empirical finding that throughout history and across countries around one third of sovereign defaults occurred in good times when output is above trend whereas most defaults occur in bad times the model is calibrated to the business cycle moments of argentina and simulation results show that the model matches business cycle facts regarding emerging economies along other dimensions moreover simulation results show that default in good times occurs 1 after the economy has accumulated a significantly large amount of capital and 2 when the economy faces a modestly good shock both of which reduce the value of external borrowing but increase the value of staying in autarky on the other hand around defaults in bad times the model economy displays typical v shape economic dynamics with a collapse in absorption upon default especially investment aggregating quarterly data from the model into annual frequency is found to overestimate the fraction of defaults in good times around twofold

free access versus private property in a resource income distributions compared distributions of income are compared under the alternative regimes of free access to and private property in a resource it is shown that in several analytically distinct cases all those deprived of free access on conversion of a resource to private property can be better off even though no compensating transfers are made this resu lt can hold even if the granting of private property rights also conf ers monopoly or monopsony power copyright 1987 by university of chicago press

the value of automobile travel time implications for congestion policy abstract public policy has remained stoutly resistant to the economic profession s call to use congestion tolls to minimize the social costs from automobile congestion this paper explores this issue by using stated preference models to estimate the value that commuters are willing to pay to save travel time we find that this value is low and surprisingly insensitive to travel conditions and how toll revenues are used it appears that even high income commuters having adjusted to congestion through their modal residential workplace and departure time choices simply do not value travel time savings enough to benefit substantially from tolls

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

an economic analysis of bankruptcy statutes personal bankruptcy statutes are analyzed as social insurance agreements the risk sharing and incentive effects resulting from changes in bankruptcy laws are studied it is shown that increasing the leniency of bankruptcy statutes may have unambiguous short term benefits to potential bankrupts but may be detrimental in the long run

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

u s consumer bankruptcy choice the importance of general equilibrium effects abstract we study the implications of u s personal bankruptcy rules for resource allocation and welfare our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform contrary to previous work we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input furthermore subjecting chapter 7 filers to means testing as suggested by recent legislative proposals would not improve upon current bankruptcy provisions and at best leave aggregate filings output and welfare unchanged however we do find that an alternative tightening of chapter 7 in the form of lower asset exemptions can increase economic efficiency

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

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

sovereign debt signals abstract this paper develops a theory of sovereign borrowing where the interaction between the asymmetry of information and the lack of commitment for repayment leads to a novel signaling motive for the issuance of sovereign debt if the government is more informed than foreign investors about a fundamental of the domestic economy then debt provides the government an option to credibly signal good news in the future by repaying thus the government has an incentive to issue debt even in the absence of the traditional consumption smoothing or tilting motives

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

spending biased legislators discipline through disagreement this paper studies politicians who have a present bias for spending they want to increase current spending and procrastinate spending cuts we argue that legislators bias is more severe in economies with low institutional quality we show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend depending on the environment legislators decisions to be fiscally responsible may either complement or substitute other legislator s decisions in economies with weak institutions politicians actions are strategic complements thus institutional changes that induce fiscal responsibility are desirable they generate a positive responsibility multiplier and reduce inefficient spending however in economies with better institutions the same institutional change would induce some legislators to free ride on others responsibility and may lead to more inefficient spending