sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

modelling sovereign credit spreads with international macro factors the case of brazil 1998 2009 abstract this paper develops a macro finance model of the brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence it finds significant evidence of common trends in the us and brazilian economies and bond markets as well as spillover effects from us inflation and business cycles to the brazilian economy the us fed funds rate influences brazilian sovereign spreads as do brazilian inflation and policy rates the brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables these results suggest that the macro finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk

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

the role of foreign currency debt in financial crises 1880 1913 versus 1972 1997 abstract we show that exposure to foreign currency debt does not necessarily increase the risk of having a financial crisis some countries do not suffer from financial fragility despite original sin before 1913 british offshoots and scandinavia afflicted with it avoided financial meltdowns today many advanced countries have original sin but few have had crises in both periods aggregate balance sheet mismatches are associated with a greater likelihood of a crisis the evidence suggests that foreign currency debt is dangerous when mis managed this is part of the difference between developed countries and emerging markets both of which borrow in foreign currency

sovereign defaults by currency denomination abstract this paper explores the drivers of sovereign default in 100 countries over the period 1996 2012 we build a new data set of sovereign defaults and find that default events for local and foreign currency bonds are equally likely however governments default under different economic and financial conditions depending on the currency in which bonds are issued the explained variation in default probability rises from 43 to 62 when we account for differences in currency denomination we also provide evidence that global factors and market sentiment which are known to drive sovereign spreads do not help explain the probability of sovereign default hence these factors appear to affect the price of sovereign credit risk although not the risk itself

fiscal space and sovereign risk pricing in a currency union abstract we examine how membership in a currency union affects public debt sustainability and market assessments of default risk in eurozone countries we argue that there exist offsetting effects expectations of bailouts tend to make a given level of debt more sustainable lowering bond yields and cds rates but constraints on the use of monetary policy would tend to have the opposite effect pushing rates up especially as room for fiscal maneuver gets exhausted we develop a formal concept of fiscal space which takes account of the notion of fiscal fatigue under which there are limits to the government s ability to raise the primary surplus in response to higher debt and apply it to the eurozone countries investigating in particular how currency union membership affects cds and bond rates during both quiet and turbulent times for a given amount of fiscal space we find that in quiet times cds and bond rates for eurozone members were below what would be expected given their fiscal space a bonus from currency union membership but when the crisis erupted cds and bond yields rose more sharply for eurozone members than would be predicted based on their available fiscal space our interpretation is that sovereign bailouts did not occur with the hoped for alacrity in euro crisis countries generating sharper penalties for sovereigns that belong to a currency union

does sovereign risk in local and foreign currency differ abstract sovereign debt in local currency has been considered safer than in foreign currency the literature offers scant guidance as to why such a gap existed or why it has slowly and steadily diminished over the past two decades we suggest and empirically test five hypotheses we find fx reserves and original sin greater financing in local currency to consistently be robust determinants of the gaps in local and foreign currency ratings as for why the gap has declined we identify as important factors the surge in global reserves and to a lesser extent the decline of original sin

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

determinants of sovereign yield spreads in the eurozone a bayesian approach abstract we analyze the determinants of sovereign yields spreads of emu member states applying bayesian model averaging bma to annual panel data from 1999 to 2009 bma is well suited in cases of small samples and high model uncertainty this seems to be the case in modeling sovereign yield spreads in the eurozone since the literature reports heterogeneous results with respect to significant explanatory variables we are testing a number of variables reported to be significant in the literature and find that the most likely country specific drivers of yield spreads are fiscal variables such as budget balance and government debt as well as external sector variables such as terms of trade trade balance and openness global financing conditions indicated by the us interest rate and market sentiments indicated by corporate bond spreads are likely to influence sovereign yield spreads

sovereign debt in emerging market countries not all of them are serial defaulters avoiding to assign emerging market countries a typical behaviour this article considers the heterogeneity across them and through time to predict their sovereign default episodes moreover it f

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

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

tiebout or not tiebout the market metaphor and america s devolution debate the market metaphor of intergovernmental choice as a spur to efficiency formalized by charles m tiebout is often invoked to support the shift away from washington and toward the states but the model translates badly to governments governmental entry and exit is costly public sector co11usion often serves citizens interests heterogeneous mobility distorts the signals sent by interstate migration and while tiebout and followers condition efficiency predictions on optimal distribution the u s devolution movement coincides with rising inequality and has gone furthest where distribution matters most the metaphor is misapplied devolution will likely do more to enfeeble government than to improve it

ideology tactics and efficiency in redistributive politics we model the electoral politics of redistribution when voters and parties care about inequality in addition to their private concerns for consumption and votes respectively ideological concerns about income redistribution lead each party to adopt a general proportional income tax adjusted to appeal to the ideological leanings of high clout groups with disproportionately many swing voters which the parties also ply with pork barrel projects our results relate to director s law which says that redistributive politics favors middle classes at the expense of both rich and poor

veto games spatial committees under unanimity rule there exists a large literature on two person bargaining games and distribution games or divide the dollar games under simple majority rule where in equilibrium a minimal winning coalition takes full advantage over everyone else here we extend the study to an n person veto game where players take turns proposing policies in an n dimensional policy space and everybody has a veto over changes in the status quo briefly we find a nash equilibrium where the initial proposer offers a policy in the intersection of the pareto optimal set and the pareto superior set that gives everyone their continuation values and punishments are never implemented comparing the equilibrium outcomes under two different agendas sequential recognition and random recognition we find that there are advantages generated by the order of proposal under the sequential recognition rule we also provide some conditions under which the players will prefer to rotate proposals rather than allow any specific policy to prevail indefinitely

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

do sovereign credit default swaps represent a clean measure of sovereign default risk a factor model approach abstract in this study we use a factor model in order to decompose sovereign credit default swaps cds spreads into default liquidity systematic liquidity and correlation components by calibrating the model to sovereign cdss and bonds we are able to present a better decomposition and a more accurate measure of spread components our analysis reveals that sovereign cds spreads are highly driven by liquidity 55 6 of default risk and 44 32 of liquidity and that sovereign bond spreads are less subject to liquidity frictions and therefore could represent a better proxy for sovereign default risk 73 of default risk and 26 86 of liquidity furthermore our model enables us to directly study the effect of systematic liquidity and flight to liquidity risks on bond and cds spreads through the factor sensitivity matrix we find that these risks do have an influence on the default intensity and they contribute significantly to spread movements finally our empirical results advance the idea that the increase in the cds spreads observed during the crisis period was mainly due to a surge in liquidity rather than to an increase in the default intensity

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

debt levels debt composition and sovereign spreads in emerging and advanced economies this paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries it finds that in emerging market countries there is a significant correlation between spreads and debt levels this correlation however is not statistically significant in countries where most public debt is denominated in local currency in advanced economies the magnitude of the correlation between debt levels and spreads is about one fifth of the corresponding correlation for emerging market economies in eurozone countries however the correlation between spreads and debt ratios is similar to that of emerging market countries the paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the eurozone but had no effect on the relationship between spreads and debt in stand alone countries finally the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities this amplifying effect of net foreign liabilities is larger in the eurozone than in stand alone advanced economies the paper concludes that debt composition matters and corroborates the original sin hypothesis that rather than being a mere reflection of institutional weakness the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies copyright 2013 oxford university press

sovereign bond yield spreads a time varying coefficient approach abstract we study the determinants of sovereign bond yield spreads across 10 emu countries between q1 1999 and q1 2010 we apply a semiparametric time varying coefficient model to identify to what extent an observed change in the yield spread is due to a shift in macroeconomic fundamentals or due to altering risk pricing we find that at the beginning of emu the government debt level and the general investors risk aversion had a significant impact on interest differentials in the subsequent years however financial markets paid less attention to the fiscal position of a country and the safe haven status of germany diminished in importance by the end of 2006 two years before the fall of lehman brothers financial markets began to grant germany safe haven status again one year later when financial turmoil began the market reaction to fiscal loosening increased considerably the altering in risk pricing over time period confirms the need of time varying coefficient models in this context

designing tax policy in federalist economies an overview abstract the emerging economic federations of the european union russia and south africa along with the established federations in australia canada and the united states confront the task of designing the institutions for federal fiscal policy this paper reviews the literature on the design of tax policy in federalist economies we conclude that taxation by lower level governments can lead to significant economic inefficiencies and inequities the usual assignment view of federalis recommends central government policies for example resident based taxation or grants in aid to correct these failures these recommendations assume that the central government will act as a benevolent social planner the political economy view of federalism suggests that this assumption is in error and that additional federalist institutions must be considered alternative legislative structures and constitutional rules are considered

legislator voting and shirking a critical review of the literature we set out to critically review the progress in answering two related questions what determines how legislators vote and how can shirking by legislators be measured in the first category the hypothesis that legislators shirk in order to indulge their personal ideological preferences has led researchers astray the theoretical underpinning is shaky on two counts first legislators who indulge their preferences at the expense of their constituents preferences put themselves at a competitive electoral disadvantage second the original two stage procedure used to measure ideological shirking is severely flawed among many other problems the residual measure of shirking implicitly assumes that the median voter is the relevant constituent principal for the legislator agent

when is two better than one how federalism mitigates and intensifies imperfect political competition the current paper models power maximizing politicians behavior subject to imperfect political competition and perfect citizen mobility it then analyzes the welfare implications of federal and non federal structures the model abstracts from both heterogeneous preferences the most common argument in favor of federalism and externalities the most common argument against showing that even in this simplified setting federalism has important welfare implications there is one class of equilibria in which more federalism has the purely beneficial effect of offsetting imperfections in the political process however there is also a second class of equilibria in which citizen mobility makes political imperfections more severe by creating safe districts for both political parties 2001 elsevier science b v all rights reserved

sovereign credit spreads under good bad governance abstract this paper explores how sovereign credit spreads vary with the level of governance an analysis of 74 countries over the 2001 2016 period shows that sovereign credit default swap cds spreads decrease with government effectiveness particularly in countries exhibiting severe default risk high indebtedness and poor economic conditions we formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues the theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads although they may choose higher indebtedness levels

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

an optimal taxation approach to fiscal federalism in a federal system of government each unit of government decides independently how much of each type of public good to provide and what types of taxes and which tax rates to use in funding the public goods in this paper we explore what types of problems can arise from this decentralized form of decision making in particular we describe systematically the types of externalities that one unit of government can create for nonresidents through both its public goods decisions and its taxation decisions the paper also explores briefly what the central government might do to lessen the costs of decentralized decision making

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

inflation linked public debt in emerging economies abstract this study reports a set of stylized facts about inflation linked il public debt in emerging economies on average emerging economies issue 23 of their local currency lc public debt linked to inflation il debt issuance is countercyclical increases in periods of nominal exchange rate depreciations and substitutes foreign currency fc and non indexed local currency debt a two sector small open economy model of public debt composition can deliver the business cycle properties of il debt and shows that during crises amid nominal exchange rate depreciations il debt becomes cheaper to issue the study finds evidence of il rates decreasing in about half of the most recent crises in emerging economies finally the study compares il rates to fc and lc rates and concludes that for some countries il rates are below lc rates even after accounting for expected inflation

heterogeneity of the determinants of euro area sovereign bond spreads what does it tell us about financial stability abstract in this paper we assess the movements of euro area sovereign bond yield spreads vis a vis the german bund as processes specified across different levels of volatility and subject to movements in asset prices and economic conditions the determinants we use are grouped into domestic and euro area aggregates thus allowing us to derive results on their relative explanatory power and compare them across time and the spectrum of countries we find that volatility influences the deterministic processes of the euro area sovereign spreads and that identical determinants have effects on spreads that vary considerably across countries furthermore we find that variables reflecting investment confidence conditions and perceptions for the upcoming economic activity are significant determinants and their significance remains to a large extent even when controlling for fiscal variables

has leviathan been bound a theory of imperfectly constrained government with evidence from the states this paper develops a formal theory that combines power maximizing leviathan political parties with well defined imperfections in the political process the model implies that both parties tend to make government larger as their likelihood of electoral victory increases empirical tests on state level data confirm this prediction racing the leviathan hypothesis against alternative theories of party motivation indicates that both the leviathan and the contrasting ideologies views have some degree of validity the leviathan motive of politicians to maximize their power is a central assumption of the public choice approach to political economy this approach has been strongly attacked for underestimating the importance of competitive checks on politicians wittman 1989 1995 in particular broadly argues that electoral competition is an effective solution to whatever principalagent problem might exist between politicians and voters yet recent research in political economy dixit and londregan 1995 1996 1998 grossman and helpman 1996 casts renewed doubt on the efficiency of political markets formal models incorporating imperfections in the electoral process show that politicians have the latitude to deviate somewhat from citizen interests although politicians face constraints they retain some measure of monopoly power a conclusion consistent with the public choice literature the main difference between recent political economy and the public choice tradition arises from their assumptions about politicians objective functions the public choice approach tends to view all political parties as power maximizers whereas others see parties as either vote

foreign currency debt and the global financial architecture abstract this paper discusses some problems posed by foreign currency debt for emerging economies in the context of the ongoing debate on the reform of the global financial architecture we present a model in which the currency composition of corporate debt is endogenous and discuss the optimality of measures aimed at coping with the risks posed by foreign currency debt while removing these risks is not necessarily efficient in the presence of moral hazard some forms of public intervention such as a tax on foreign currency debt or international bailouts may be optimal