are the poverty effects of trade policies invisible beginning with the wto s doha development agenda and establishment of the millennium development goal of reducing poverty by 50 percent by 2015 poverty impacts of trade reforms have become central

contagion during the greek sovereign debt crisis abstract we examine the impact of news about greece and news about a greek bailout on bank stock prices in 2010 using data for 48 european banks we identify the twenty days with extreme returns on greek sovereign bonds and categorise the news events during those days into news about greece and news about the prospects of a greek bailout we find that except for greek banks news about greece does not lead to abnormal returns while news about a bailout does even for banks without any exposure to greece or other highly indebted euro countries this finding suggests that markets consider news about the bailout to be a signal of european governments willingness in general to use public funds to combat the financial crisis sovereign bond prices of portugal ireland and spain respond to both news about greece and news about a greek bailout

cooperation dynamics in repeated games of adverse selection abstract we study cooperation dynamics in repeated games with markovian private information after any history signaling reveals information that helps players coordinate their future actions but also makes the problem of coordinating current actions harder in equilibrium players may play aggressive or uncooperative actions that signal private information and partners tolerate a certain number of such actions we discuss several applications of our results we explain the cycles of cooperation and conflict observed in trench warfare during world war i show that price leadership and unilateral price cuts can be part of an optimal signaling equilibrium in a repeated bertrand game with incomplete information and show that communication between cartel members may be socially efficient in a repeated cournot game finally we show that the welfare losses disappear as the persistence of the process of types increases and the interest rate goes to zero

debt maturity without commitment i analyze how lack of commitment afiects the maturity structure of sovereign debt governments balance beneflts of default induced redistribution and costs due to income losses in the wake of a default their choice of short versus longterm debt afiects default and rollover decisions by subsequent policy makers the equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that re ect the price impact of these decisions the model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high output low or a cross default more likely these predictions are consistent with empirical evidence

fiscal spillovers in the euro area this paper analyses the dynamic effects of fiscal imbalances in a given emu member state on the borrowing costs of other countries in the euro area the estimation of a multivariate multi country time series model specifically a global var or gvar using quarterly data for the emu period suggests that euro denominated government yields are strongly linked with each other however financial markets seem to be able to discriminate among different issuers consequently fiscal imbalances in italy and in other peripheral countries should be closely monitored by their emu partners and the european institutions

biased signaling and yardstick comparisons in a sovereign debt market abstract this paper develops a sovereign debt model in which governments are privately informed about their likelihood of default but can themselves have a biased perception of this likelihood i show that in this setup government borrowing acts as a signal that is only partially informative about fundamental default probabilities and bond prices do not necessarily reflect true credit risk i also show that in a two country version of the model correlations between the two countries induces yardstick comparisons and the borrowing decision of one government affects the bond price received by the other whether the information spillover increases or decreases the distortion created by the bias depends on the extent to which borrowing signals reinforce each other

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

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

is it punishment sovereign defaults and the decline in trade sovereign defaults are associated with declines in defaulting countries trade are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest we devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines bilateral trade with creditor countries should fall more than trade with other countries we find that this is not the case the analysis does not yield much evidence of broader punishment strategies including a league of major creditors either these results contradict the predictions of the trade sanctions theory of sovereign borrowing

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

do countries falsify economic data strategically some evidence that they might we find evidence supporting the hypothesis that countries at times misreport their economic data in a strategic manner among those suspected are countries with fixed exchange rate regimes high negative net foreign asset positions or negative current account balances which corroborates the intuition developed with a simple economic model we also find that countries with bad institutional quality rankings and those in africa middle east eastern europe and latin america release economic data of questionable veracity our evidence calls for models with public signals to consider strategic misinformation and for establishing independent statistical agencies to assure the delivery of high quality economic data

beliefs and long maturity sovereign debt abstract a novel form of strategic complementarities is explored in a standard quantitative model of long maturity sovereign debt discrepancies in long run beliefs dilute current prices differently negative long run beliefs become self fulfilling if the sovereign optimally borrows more and defaults more frequently in the face of worse prices a strong curvature in the flow utility is an important ingredient in generating this response the intuition bears out both through a multiplicity of markov equilibria and in sunspot equilibria that mimic trigger strategies in repeated games in the benchmark model average spreads are roughly 67 higher 200 basis points and debt to gdp ratios are roughly 9 higher 5 percentage points when beliefs are pessimistic the model also reveals limitations to third party coordination of expectations as a policy tool

vertical debt spillovers in emu countries abstract this article examines the extent to which subnational governments may drive sovereign risk premiums is subnational fiscal policy affecting the interest rates on central government bonds furthermore we focus on a number of causal mechanisms that may mitigate or reinforce these upstream vertical spillovers i e the presence of bailout expectations and subnational borrowing autonomy our findings indicate that debt accumulation by subnational governments sng spills over onto sovereign risk premiums when the restrictions on sng borrowing are weak and when investors believe that subsovereign debts are backed by the center the results suggest that spillovers may be reduced through a proper design of a country s fiscal and institutional framework countries should either bolster the sovereignty of subnational governments by increasing sng fiscal autonomy or tightening up sng borrowing constraints

observing bailout expectations during a total eclipse of the sun abstract the literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard exploiting an exceptional historical example this paper proposes an original method to address this issue as the corona which is observable only during a total eclipse of the sun market specific prices of repudiated bonds are observable only when extreme conditions segment the markets such very rare events allow for isolating pure country specific bailout expectations the paper shows that bailouts do create creditor moral hazard based on an impulse response analysis the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation

simultaneous offers bargaining with a mediator abstract an arbitrator is often introduced into bargaining to avoid disagreement the arbitrator s role is to impose some agreement when negotiators cannot reach an agreement however in models with an arbitrator a fair agreement for negotiators is eliminated from equilibrium outcomes if the arbitrator is biased to avoid disagreement without eliminating the achievability of a fair agreement in equilibrium we consider introducing a mediator while an arbitrator imposes an agreement a mediator can only give advice we analyze a simultaneous offers bargaining model with a mediator and obtain the following desirable results first disagreement is not supported as an outcome of a stationary subgame perfect equilibrium sspe second even if a mediator is biased the fair agreement in the sense of the nash bargaining solution nbs is always one of the sspe agreements finally if a mediator is fair negotiators always reach an agreement with the nbs in sspe

signalling with many signals this paper examines a market with asymmetric information where there are many signals available and where both the costs of signaling and the product value may depend on many privately known characteristics under a weak condition on the relationship between the marginal cost of increasing the signals and the product value a separating set exists whereby the value of every seller s product is inferred from the seller s optimal choice of signals the separating set constructed is pareto dominant and corresponds to recently proposed equilibrium notions in signaling and screening models copyright 1987 by the econometric society

a cross country analysis of consumption patterns this paper uses the system wide approach to analyse the consumption patterns in 18 oecd countries the results show that on average the oecd per capita consumption increased by 3 per annum and prices increased by about 7 per annum oecd consumers spend about half of their income on food housing and transport it is also shown that in most oecd countries food housing and medical care are necessities and clothing durables transport and recreation are luxuries and that the demand for all goods considered are price inelastic the controversial hypothesis of stigler and becker 1977 that tastes are the same across countries is also tested and it is found that the oecd consumption data do not support their claim

fragmented government effects on fiscal policy new evidence most industrialized countries entered the 1980s with their public finances in disarray at the time persistent deficits pushed up public debt to gdpratios despite such similarities deficit spending varies substantially between countries and within countries over time recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued using a panel of 22 oecd countries over the 1971 1996 period this paper extends previous literature on the effects of fragmented government on fiscal policy outcomes in various directions first we focus on data relating to central government instead of general government as all theories refer to central government second not only do we analyze the effect of size fragmentation of government we also examine government s position vis a vis parliament and government s political fragmentation we find evidence that more fragmented government defined in terms of the number of political parties in a coalition or the number of spending ministers have higher deficits there is also some evidence that governments that dispose of excess seats in parliament have lower deficits right wing governments appear to have been fiscally more responsible in the seventies political fragmentation does not affect government s budget deficit

what drives provincial canada yield spreads although recent research has led to a deeper understanding of the factors determining yields on long term canada bonds there has been little corresponding work on provincial bonds this is despite the fact that unlike the us state bond market provincial debt represents a significant part of the canadian bond market provincial and state debt are examples of sub national debt which are backed by taxing powers similar to that of the national government but without control of the money supply which leaves them open to the possibility of default or payment rescheduling this in turn makes them similar to corporate debt by using a carefully constructed new data set we establish two important results first provincial fiscal positions debt and deficits are an important factor in determining yield spreads between provincial and canada bonds second we show that provincial bonds are a substitute for corporate debt in that during recessionary flights to quality their yields react similar to those on corporate bonds

how do official bailouts affect the risk of investing in emerging markets we analyze the effects of bailout expectations on sovereign bond spreads in emerging markets the non bailout of russia in august 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets if official rescues are expected to mitigate the losses of investors in the event of a crisis such an event should raise the cross country dispersion of spreads because investors pay more attention to differences in risk characteristics across countries we find strong evidence for such an effect this is consistent with the existence of investor moral hazard at least prior to 1998

quality of government institutions and spreads on sovereign credit default swaps abstract we examine how the quality of government institutions affects the likelihood of sovereign default we find both economically and statistically significant adverse effects of country governance indicators on sovereign credit default swap spreads the evidence suggests that better quality governance enhances a country s willingness to repay debt and hence reduces the probability of sovereign default the results still hold after we account for potential endogeneity and conduct a number of robustness tests

on the contribution of game theory to the study of sovereign debt and default this paper reviews the lessons learned from the application of the tools of game theory to the theoretical study of sovereign debt and default we focus on two main questions first we review answers to the most fundamental question in the theory of sovereign debt given that there is no supranational institution for enforcing the repayment of debts why do countries ever repay their debts second we review theories of the process by which sovereign debts are restructured with a view to answering the following question why does the process of sovereign debt restructuring appear so inefficient the first question raises issues in the design of self enforcing contracts and on the credibility of threats to punish a country in default the second question involves applications of the theory of bargaining in environments where the parties to a bargain cannot commit to honour the terms of the bargain or even commit to enter into negotiations in the first place copyright 2013 oxford university press

spatial dependence through local yardstick competition theory and testing abstract we propose a model of contracting for natural monopolies in which yardstick evaluation of performance can be optimal where principals have partially unobservable objective functions and agents are risk averse an externality is generated which can be observed in patterns of spatial dependence imposing standard contracting rules on principals can eliminate the externality and spatial dependence we test this prediction using spatial econometrics on uk data covering a regime shift from independent contracting to compulsory competitive tendering rules

the distributional impacts of indonesia s financial crisis on household welfare analyzing the distributional impacts of economic crises is an ever more pressing need if policymakers are to intervene to help those most adversely affected they need to identify those who have been hurt most and estimate the magnitude of the harm they have suffered they must also respond in a timely manner this article develops a simple methodology for measuring these effects and applies it to analyze the impact of the indonesian economic crisis on household welfare using only pre crisis household information it estimates the compensating variation for indonesian households following the 1997 asian currency crisis and then explores the results with flexible nonparametric methods it finds that virtually every household was severely affected although the urban poor fared the worst the ability of poor rural households to produce food mitigated the worst consequences of the high inflation the distributional consequences are the same whether or not households are permitted to substitute toward relat

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

affluence and food a simple way to infer incomes accurate and timely measures of cross country real incomes are still a rarity as the share of expenditure devoted to food is readily available we use engel s law in reciprocal form to measure affluence analysis of real income data for over 100 countries indicates that this approach is viable to recognize the role of uncertainty in the analysis we present the results in the form of stochastic cross country income comparisons

sovereign defaults and liquidity crises abstract sovereign debt crises in emerging markets are usually associated with liquidity and banking crises the conventional view is that the domestic turmoil is the consequence of foreign retaliation although there is no clear empirical evidence on classic default penalties this paper emphasizes instead a direct link between sovereign defaults and liquidity crises building on two natural assumptions i government bonds represent a source of liquidity for the domestic private sector and ii the government cannot discriminate between domestic and foreign creditors in the event of default in this context external debt emerges even in the absence of classic penalties and government default is countercyclical triggers a liquidity crunch and amplifies output volatility in addition a reform that involves a substitution of government bonds with privately sourced liquidity instruments could backfire by restricting governments access to foreign credit

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

the relation between sovereign credit rating revisions and economic growth abstract a country s economic growth exhibits a significant response to sovereign rating changes a one notch upgrade downgrade causes an increase decline of about 0 6 0 3 in re rated countries five year average annual growth rates the results hold after accounting for other determinants of economic growth and potential endogeneity problems and are robust to the use of quarterly data changes in country rating affect economic growth via the interest rate and capital flow channels narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades which stimulate re rated countries economic performance and the converse holds for downgrades

predicting within country household food expenditure variation using international cross section estimates there is a long and distinguished literature involving demand analysis using international cross section data such models are widely used for predicting national per capita consumption however there is nothing in this literature testing the performance of estimated models in predicting demands across the income spectrum within a single country this paper fills the gap we estimate an aidads model using cross section international per capita data and find that it does well in predicting food demand across the income distribution within bangladesh this suggests that there may be considerable value in using international cross section analysis to study poverty and distributional impacts of policies

debt and default in the 1930s causes and consequences abstract this paper studies interwar experience with external debt and default it begins with a description of the contours of international borrowing and lending in the 1920s we then use some empirical models from recent literature on the 1970s to describe the interwar data macroeconomic variables for over 20 countries are related to cross section variations in borrowing and debt during the period from the end of the 1920s to 1938 the paper then considers the incidence and correlates of sovereign default for 1934 1938 using regression to determine the association between standard measures of economic structure and performance and subsequent interruptions to debt service such variables as the magnitude of the debt burden the deterioration of the terms of trade during the great depression and the stance of monetary and fiscal policies provide a remarkably accurate explanation of the incidence of default we go on to provide a long run perspective on default and on the remedies available to creditors the provisions of loan contracts are reviewed with an eye toward analyzing the scope for renegotiation the discussion emphasizes the contrast between the regime of bond finance that prevalied in the interwar years and the current regime of bank lending we analyze the roles of governments banks and bondholders protective committees in the negotiation process we then present new estimates of the ex post realized rates of return on british and american foreign lending in the 1920s this empirical analysis uncovers a striking contrast in the returns realized on loans floated in the two countries while the nominal internal rate of return on dollar loans was less than 1 per annum the comparable return on sterling loans was in excess of 5 the paper concludes with a discussion of factors which help to account for this dramatic difference

over optimism in forecasts by official budget agencies and its implications the paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries in general the forecasts are found i to have a positive average bias ii to be more biased in booms and iii to be even more biased at the 3 year horizon than at shorter horizons this over optimism in official forecasts can help explain excessive budget deficits especially the failure to run surpluses during periods of high output if a boom is forecasted to last indefinitely retrenchment is treated as unnecessary many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or better yet the structural deficit but we also find iv countries subject to a budget rule in the form of euroland s stability and growth pact sgp make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries this effect may help explain frequent violations of the sgp the question becomes how to overcome governments tendency to satisfy fiscal targets by wishful thinking rather than by action chile in 2000 created structural budget institutions that may have solved the problem independent expert panels insulated from political pressures are responsible for estimating the long run trends that determine whether a given deficit is deemed structural or cyclical the result is that chile s official forecasts of growth and the budget have not been overly optimistic even in booms unlike many countries in the north chile took advantage of the 2002 7 expansion to run budget surpluses and so was able to ease in the 2008 9 recession

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

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

fiscal restraints and voter welfare this paper explores the logic of fiscal restraints in a political agency model with both moral hazard and adverse selection the role of the political process is both to discipline incumbents who may act against the public interest and to sort in those politicians who are most likely act in voters interests we use the model to examine the optimality of inefficient taxation limits on the size of government increasing transparency and yardstick competition some conclusions are surprising for example we show that some forms of fiscal restraint can only be desirable when incumbents are sufficiently likely to be benevolent

nominal sovereign debt i show that reputation alone can sustain nominal sovereign debt which is subject to both the risks of default and opportunistic devaluations nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete thus the loss of either repayment or monetary reputation severely affects the government s ability to smooth consumption the model offers a simple explanation for the bulow and rogoff critique while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies the model also helps explain why many governments borrow and save at the same time

persistent gaps and default traps we show how vicious circles in countries credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks in such an environment default signals the borrower s vulnerability to adverse shocks and creates a pessimistic growth outlook this translates into higher interest spreads and debt servicing costs relative to income raising the cost of future repayments thereby creating default traps we build a long and broad cross country dataset to show the existence of a history dependent default premium and of significant effects of output persistence on sovereign creditworthiness consistent with the model s predictions

gambling reputation repeated bargaining with outside options we study the role of incomplete information and outside options in determining bargaining postures and surplus division in repeated bargaining between a long run player and a sequence of short run players the outside option is not only a disagreement point but reveals information privately held by the long run player in equilibrium the uninformed short run players offers do not always respond to changes in reputation and the informed long run player s payoffs are discontinuous the long run player invokes inefficient random outside options repeatedly to build reputation to a level where the subsequent short run players succumb to his extraction of a larger payoff but he also runs the risk of losing reputation and relinquishing bargaining power we investigate equilibrium properties when the discount factor goes to 1 and when the informativeness of outside options diffuses in both cases bargaining outcomes become more inefficient and the limit reputation building probabilities are interior publication abstract

nash meets rubinstein in final offer arbitration abstract i consider a final offer arbitration model in which the offers are submitted sequentially the parties are allowed to accept offers and the arbitrator maximizes nash s social welfare function i show that backwards induction in this three period model leads to the subgame perfect equilibrium outcome of rubinstein s infinite horizon alternating offer bargaining game

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

sovereign risk premiums in the european government bond market this paper provides a study of bond yield differentials among eu government bonds issued between 1993 and 2005 on the basis of a unique dataset of issue spreads in the us and dm euro bond market interest differentials between bonds issued by eu countries and germany or the usa contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer s relative bond market size the start of the european monetary union has shifted market attention to debt service payments as the key measure of indebtedness and eliminated liquidity premiums in the euro area

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

the output costs of hard and soft sovereign default abstract how costly are sovereign debt crises in this paper we study output losses during sovereign default and debt renegotiation episodes since 1980 in contrast to previous work we account for the severity of default and not only for its occurrence specifically we distinguish between hard and soft defaults using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors we show that hard defaults are associated with a much steeper drop in gdp of up to ten percent compared to soft defaults the results are consistent with theoretical models assuming proportional output costs of default

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

non economic engagement and international exchange the case of environmental treaties we examine the role of non economic partnerships in promoting international economic exchange since far sighted countries are more willing to join costly international partnerships such as environmental treaties environmental engagement tends to encourage international lending countries with such non economic partnerships also find it easier to engage in economic exchanges since they face the possibility that debt default might also spill over to hinder their non economic relationships we present a theoretical model of these ideas and then verify their empirical importance using a bilateral cross section of data on international crossholdings of assets and environmental treaties our results support the notion that international environmental cooperation facilitates economic exchange

do credit markets discipline sovereign borrowers evidence from u s states the degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by u s states the results generally support an optimistic view of the market discipline hypothesis with credit markets providing incentives for sovereign borrowers to restrain borrowing while the risk premium on bond yields is estimated to increase only gradually at low levels of debt this effect appears to become much larger as debt rises there is also some evidence that credit markets may withhold access to credit at very high levels of debt copyright 1995 by ohio state university press

decentralisation as an incentive scheme recent changes have introduced more decentralization in a number of traditionally centralized countries 1 in the case of france it is sometimes claimed that the 1982 1983 reform of subcentral government is of historical importance although the principles of that reform are not contested any more by the new majority elected in 1986 opinions still differ on a number of policy issues some of the issues are presented in this introductory section but the main purpose of this paper is not to expose or discuss in detail the problems of decentralization in france as argued in the second part of the introductory section the theoretical framework in which the policy issues of decentralization are usually discussed by economists is somewhat unsatisfactory in particular when applied to unitary states such as britain or france the bulk of the paper is devoted to the exploration of a different approach to decentralization it is not purported however that this approach could completely replace the more traditional one consequently when in the concluding section we return briefly to the policy issues identified here this is to be read as a preliminary attempt to evaluate the relevance of the reasoning developed in the paper

in search of yardstick competition a spatial analysis of italian municipality property tax setting this paper uses italian local government data to test for fiscal interaction arising from yardstick competition to discriminate yardstick competition from competing theories of strategic interaction we account for the incentives and constraints generated by the electoral system in particular for the presence of term limits and the size of the majorities supporting the mayors estimation of a local property tax setting equation uncovers positive spatial auto correlation in local tax rates of jurisdictions where the mayors run for re election in uncertain contests while interaction is absent where either mayors face a term limit or are backed by large majorities

imf bailouts and moral hazard this paper empirically investigates the extent of investor moral hazard associated with imf bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of imf bailouts of countries undergoing financial crisis we do not find strong evidence that the extent of investor moral hazard changed after the non bailout of russia in august 1998 that signaled a modification to imf intervention policy in contrast we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the imf and that are thereby more likely to be bailed out by the imf this pattern prevailed even after the russian crisis

fiscal policy and interest rates in europe the appetite for fiscal discipline has been steadily declining among most industrial countries in the past fiscal profligacy would have been punished by markets with higher interest rates and in some cases also exchange rate depreciation however in post emu europe exchange rate markets no longer discipline the fiscal behaviour of national governments perhaps more crucially even the interest rate punishment to fiscal indiscipline is highly uncertain with academic opinions being quite divided on this issue this paper takes a close look at the link between fiscal policy and interest rates in the european context the key finding is that an expansionary fiscal policy in one emu member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole with the second effect however being quantitatively much more significant this suggests that there are indeed substantial spillovers through the interest rate channel among fiscal policies of member countries to limit countries incentive to run expansionary fiscal policies a set of rules like those embedded in the stability and growth pact is then needed some weak evidence is also found that after emu interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress there may be a case then for imposing tighter rules on high debt countries riccardo faini

sub nationals risk premia in fiscal federations fiscal performance and institutional design the recent debt crisis in europe highlighted the importance of institutional design and in particular bail out clauses in determining states risk premia in fiscal or quasi fiscal federations this paper examines the determinants of sub national governments risk premia in fiscal federations using secondary market data for the usa canada australia and germany it finds that as for central governments fiscal fundamentals matter in the pricing of risk and sub national governments with higher public debt and larger deficits pay higher premia however this relationship is not uniform across federations and it differs with institutional arrangements in particular market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government we show that when sub national governments depend on high transfers from the central government i e when there is some form of implicit guarantee from the center markets are less responsive to sub national governments fiscal fundamentals using primary market data the paper also shows that high transfer dependency lowers the probability of sub national governments to borrow on capital markets

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

overconfidence insurance and paternalism it is well known that when agents are fully rational compulsory public insurance may make all agents better off in the rothschild and stiglitz 1976 model of insurance markets we find that when sufficiently many agents underestimate their personal risks compulsory insurance makes low risk agents worse off hence behavioral biases may weaken some of the well established rationales for government intervention based on asymmetric information

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

strategic models of sovereign debt renegotiations the sovereign debt literature has often implicitly assumed that all the power in the bargaining game between debtor and creditor lies with the latter this paper explores that assumption by analyzing three game theoretic models of debt renegotiations in two of the models both of which are built on the traditional one sector growth model all the subgame perfect equilibria have an extreme form in which the game s surplus is captured by the creditor the third game has many subgame perfect equilibria that do not have this feature however the roles of various assumptions in all three games are examined

a time series analysis of a demand system based on cross country coefficient estimates abstract annual dutch consumption data 1952 1977 for 10 goods which exhaust the consumer s budget are analyzed by means of a complete demand system whose coefficients are obtained from the cross country data collected by kravis 1982

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

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

yardstick competition in intergovernmental relationships theory and empirical predictions abstract we review yardstick competition theory as applied to fiscal choices in the intergovernmental context we show that the theory is consistent with opposite results concerning neighbouring governments fiscal behaviour and discuss some empirical implications

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

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

exit voice and mimicking behavior evidence from swiss cantons previous empirical literature hasshown that in order to overcome agencyproblems voters make inter jurisdictionalcomparisons of fiscal performance whenmaking electoral decisions incumbents therefore anticipate voters feedback by copying fiscal policy decisionsfrom neighbors this paper argues thatfiscal autonomy exit as well as directlegislation voice enrich politicalcompetition reducing thus the influence of electoral competition onfiscal decisions consequently policymimicking does not matter in circumstancesof direct legislation and fiscal autonomywhere the impact of voters on the politicalagenda is particularly strong based onpanel data between 1980 and 1998 we findencouraging evidence supporting ourtheoretical arguments

implications of higher global food prices for poverty in low income countries in many poor countries the recent increases in prices of staple foods raise the real incomes of those selling food many of whom are relatively poor while hurting net food consumers many of whom are also relatively poor the impacts on poverty will certainly be very diverse but the average impact on poverty depends upon the balance between these two effects and can only be determined by looking at real world data results using household data for ten observations on nine low income countries show that the short run impacts of higher staple food prices on poverty differ considerably by commodity and by country but that poverty increases are much more frequent and larger than poverty reductions the recent large increases in food prices appear likely to raise overall poverty in low income countries substantially

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

the costs of sovereign default theory and empirical evidence economic policymakers sometimes perceive a sovereign default as a jump into the unkown the main piece of information missing is what the costs of the default are going to be assessing these costs correctly is crucial for evaluating how far a country should go to avoid a default this paper analyzes the main sources of the costs of default discussed in the theoretical literature and evaluates the empirical evidence on the matter i classify these potential sources in three groups 1 sanctions imposed as penalties by creditors 2 costs related to the information content of default and 3 costs related to domestic agents sovereign bond holdings i then present a simple model that captures the main intuition behind each of them a review of the empirical evidence suggests that while the costs generated in the aftermath of defaults by traditional mechanisms such as trade sanctions or exclusion from credit markets have not been significant in recent decades costs deriving from information revelation and the impact on domestic bondholders particularly the banking system have become major consequences of sovereign defaults

excessive dollar debt financial development and underinsurance we propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar denominated external debt present in these markets we show that when financial constraints affect borrowing and lending between domestic agents agents undervalue insuring against an exchange rate depreciation since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars this result implies that domestic agents choose excessive dollar debt we also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets the retarded entry reinforces the underinsurance problem

sovereign bond market reactions to no bailout clauses and fiscal rules the swiss experience abstract we analyse the effects of a credible no bailout policy and stringent sub national fiscal rules on the risk premia of swiss sub national government bonds in the period from 1981 to 2007 in july 2003 the swiss supreme court decided that the canton of valais is not liable for municipal debt this landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before the result demonstrates that a not fully credible no bailout commitment can entail high costs for the potential guarantor additionally strong and credible balanced budget rules reduce risk premia

quadratic engel curves and consumer demand this paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices a nonparametric analysis of consumer expenditure patterns suggests that engel curves require quadratic terms in the logarithm of expenditure while popular models of demand such as the translog or the almost ideal demand systems do allow flexible price responses within a theoretically coherent structure they have expenditure share engel curves that are linear in the logarithm of total expenditure we derive the complete class of integrable quadratic logarithmic expenditure share systems a specification from this class is estimated on a large pooled data set of u k households models that fail to account for engel curvature are found ro generate important distortions in the patterns of welfare losses associated with a tax increase

labor market signaling and self confidence wage compression and the gender pay gap i extend spence s signaling model by assuming that some workers are overconfident they underestimate their marginal cost of acquiring education and some are underconfident firms cannot observe workers productive abilities and beliefs but know the fractions of high ability overconfident and underconfident workers i find that biased beliefs lower the wage spread and compress the wages of unbiased workers i show that gender differences in self confidence can contribute to the gender pay gap if education raises productivity men are overconfident and women underconfident then women will on average earn less than men finally i show that biased beliefs can improve welfare

alternating offer games with final offer arbitration abstract i analyze an alternating offer model that integrates the common practice of having an arbitrator determine the outcomes if both players offers are rejected i assume that the arbitrator uses final offer arbitration as in professional baseball i find that if the arbitrator does not excessively favor one player then the unique subgame perfect equilibrium always coincides with the subgame perfect equilibrium outcome in rubinstein s infinite horizon alternating offer game however if the arbitrator sufficiently favors the player making the initial offer then delay occurs in equilibrium

sovereign debt maturity structure under asymmetric information abstract this paper studies the optimal choice of sovereign debt maturity when investors are unaware of the government s willingness to repay under a pooling equilibrium there is a wedge between the borrower s true default risk and the default risk priced in debt and its size differs with the maturity of debt safe borrowers tilt their debt maturity towards short term relative to the optimal choice under perfect information since long term debt pools more default risk that is not inherent to them risky borrowers mimic their behavior of safe borrowers to preclude the market from identifying their type in times of financial distress spreads increase and the default risk wedge of long term debt relative to short term debt increases which makes borrowers shorten their debt maturity data on bond issuances for a panel of countries show that consistent with the model maturities co vary negatively with spreads and that this co movement is stronger in those situations in which informational asymmetries are larger