a bright future can be ours macroeconomic policy for non eurozone western countries radical changes in macroeconomic policy could produce a brighter future the neoclassical myth that a free market economy inevitably moves to an equilibrium position determined solely by supply side factors must be rejected and replaced by the insight that the position of an economy in the longer run is path dependent fiscal policy in recessions should be biased towards increasing physical and human capital which will improve the productivity of an economy raising living standards and hence taxable capacity thus enabling future public debt to be reduced if this is desirable monetary policy should play a very minor role in aggregate demand policy with interest rate settings largely used to help achieve long term income distribution goals all this is fundamental to geoff harcourt s vision of macroeconomic policy and this paper spells out how this vision can be implemented in 2012 in western countries not hamstrung by euro zone rules and regulations

the impact of government debt expenditure and taxes on aggregate investment and productivity growth in this paper we evaluate empirically the impact of fiscal policy on two key determinants of long term growth i e private investment and productivity growth we mostly focus on a panel of 20 oecd economies from 1970 to 2009 although we also present some estimates based on data for 80 developing economies our findings suggest that high public debt adversely affects both aggregate investment spending and productivity growth through distortions related to the size of the public sector we also find weak evidence of some non linear effects on productivity with government debt becoming more detrimental in advanced economies when above 85 90 of gdp

inflation dynamics and the output inflation trade off international panel data evidence we explore the impact of inflation and its variability on the output inflation trade off using a unified single step approach in a panel data context a limitation of earlier empirical approaches is that they focus on either cross country or country by country time series analyses this paper employs a dynamic heterogeneous panel data specification and uses an all encompassing estimation framework that accounts for parameter heterogeneity cross sectional dependence dynamics and non stationarity our sample covers 60 countries from 1970 to 2010 while inflation variability reduces the trade off for specific periods and country groups an unambiguous and more pronounced negative relation emerges between the inflation rate and the responsiveness of real output to nominal shocks the findings are in line with the new keynesian view of a negative association between the rate of inflation and the output inflation trade off as well as with the observed flattening of the phillips curve over the past decades

macroeconomic features of the french revolution this paper describes aspects of the french revolution from the perspective of theories about money and government budget constraints we describe how unpleasant fiscal arithmetic gripped the old regime how the estates general responded to reorganize france s fiscal affairs and how fiscal exigencies impelled the revolution into a procession of monetary experiments ending in hyper inflation

sovereign debt and its restructuring framework in the eurozone debt is a particularly serious macroeconomic problem in the eurozone public debt ratios are high by international historical standards with no immediate prospect of a significant reduction private corporate and household debt ratios are either flat or rising banks remain fragile and impose a contingent liability on the public purse the most stressed economies have not had the option of renewing economic growth through exchange rate depreciation and a boost to exports thus fiscal austerity has been their principal instrument to achieve debt reduction but since austerity also hurts growth the debt to gdp ratios have barely budged persistent low growth has also created deflationary tendencies which further raise the challenge of debt reduction

new evidence on the output inflation trade off from developing economies the case of the cfa franc zone this aim of this paper is to give a contribution to the debate on whether output inflation trade offs are negatively influenced by the mean of inflation as postulated by new keynesians or by the variability of inflation as postulated by neo classical economists to remove any concerns about the arbitrariness of the choice of the sample the analysis will focus on a group of countries belonging to the same currency union the franc zone the results do not provide conclusive evidence on either theory as it was found that there existed a negative relation between the output inflation trade offs and the mean of inflation on the one hand and the variability of inflation on the other

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

sovereign debt relief and its aftermath this paper studies sovereign debt relief in a long term perspective we quantify the relief achieved through default and restructuring in two distinct samples 1920 1939 focusing on the defaults on official government to government debt in advanced economies after world war i and 1978 2010 focusing on emerging market debt crises with private external creditors debt relief was substantial in both eras averaging 21 of gdp in the 1930s and 16 of gdp in recent decades we then analyze the aftermath of debt relief and conduct a difference in differences analysis around the synchronous war debt defaults of 1934 and the baker and brady initiatives of the 1980s 1990s the economic landscape of debtor countries improves signicantly after debt relief operations but only if these involve debt write offs softer forms of debt relief such as maturity extensions and interest rate reductions are not generally followed by higher economic growth or improved credit ratings jel e6 f3 n0 and h6

lessons from the past capital markets during the 19th century and the interwar period on friday 13 august 1982 finance minster jesus silva herzog of mexico made a series of visits to the international monetary fund the federal reserve and the u s treasury his message to each was the same mexico could no longer continue to service its debt thus began a dramatic weekend of negotiations that marked the end of the preceding decade s buoyant expansion of developing country debt and the start of a still continuing response to the sudden collapse

discretionary monetary and fiscal policy with endogenous sovereign risk abstract how does the presence of sovereign risk affect the conduct of public policy to answer this question this paper studies optimal monetary and fiscal policy without commitment for a model economy with nominal public debt and strategic sovereign default compared to an economy without the possibility of default economies with sovereign risk experience more volatile interest rates which impedes the government s ability to smooth tax rates across states risk of default also limits public debt accumulation reducing the government s incentive to use surprise inflation on average when calibrated to the united states the model predicts that a counterfactual increase in the average annual default probability from 0 to 1 lowers average inflation by 33 raises the standard deviation of inflation by 18 and increases the standard deviation of the labor income tax by 73 the transmission of exogenous shocks to real aggregate quantities is however almost unaffected by the possibility of default for example the presence of sovereign risk would increase the standard deviation of log real gdp by less than 1 in the experiment above similarly the welfare consequences of sovereign risk are found to be of negligible size as well

the forgotten history of domestic debt there is a rich scholarly literature on sovereign default on external debt comparatively little is known about sovereign default on domestic debt even today cross country data on domestic public debt remains curiously exotic particularly prior to the 1980s we have filled this gap in the literature by compiling a database on central government public debt external and domestic the data span 1914 to 2010 for most countries reaching back into the nineteenth century and earlier for many our findings here on debt sustainability sovereign defaults the temptation to inflate and the hierarchy of creditors only scratch the surface of what the domestic public debt data can reveal first domestic debt is big for the 64 countries for which we have long time series domestic debt accounts for almost two thirds of total public debt for most of the sample this debt carries a market determined interest rate except for the financial repression era between wwii and financial liberalization second the data go a long way toward explaining the puzzle of why countries so often default on their external debts at seemingly low debt thresholds third domestic debt has largely been ignored in the vast empirical work on inflation in fact domestic debt a significant portion of which is long term and nonindexed is often much larger than the monetary base in the run up to high inflation episodes last the widely held view that domestic residents are strictly junior to external creditors does not find broad support

social contracts as assets a possible solution to the time consistency problem this paper presents a new solution to the time consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work the solution involves formulating a social contract institution or agreement that specifies the optimal ex ante policy the social contract is effectively sold by succesive old generations to successive young generations who pay for the social contract through the payment of taxes both old and young generations have an economic incentive to fulfill the social contract for the old generation breaking the social contract makes the social contract valueless and the generation suffers a capital loss by not being able to sell it for the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract

foreign debt versus domestic debt in the euro area the aftermath of the 2008 financial crisis has led to a sharp rise in public debt throughout the developed world the problem is particularly acute within the euro area where several governments needed financial assistance from the international monetary fund and the european stability mechanism this paper argues that public debt poses much greater problems when it is owed to foreigners i e when it constitutes foreign debt this view implies that the key to overcoming the euro crisis is in the external adjustment not the fiscal adjustment another implication is that in a crisis a strong fiscal adjustment is desirable not because it can immediately reduce the public debt gdp ratio but because it reduces domestic absorption and thus reinforces the external adjustment copyright 2013 oxford university press

sovereign debt defaults insights from history history provides many insights to address the issue of sovereign debt defaults this article first presents a detailed account of defaults in historical perspective it then discusses the solutions devised in the past to address sovereign debt crises and puts these into perspective with today s answers when crises occur finally the paper stresses the role of history when the events studied do not occur frequently and when archival data may shed new light on the process of the resolution of crises the impact of odious debts declarations of state succession and of international relations on sovereign defaults and on their settlement is thus also addressed copyright 2013 oxford university press

increasing public debt and the role of central bank independence for debt maturities abstract governments are interested in lengthening debt maturity to reduce fiscal refinancing and default risks on the other hand investors may worry that highly indebted governments will inflate away their debts when it is long term based on a new panel dataset spanning from 1990 2016 for 28 oecd countries the paper finds that governments prolong the average debt maturity if debt ratios increase interestingly the marginal effect of the debt ratio on average maturity is higher for countries with an independent central bank than for countries with a more politically dependent one there are two possible explanations for this effect of central bank independence first an independent central bank reduces the inflation risk premium that longer maturities otherwise would have second governments with independent central banks are unable to use monetary policy for inflating and reducing fiscal and interest rate shock burdens again this calls for longer maturities to reduce the relevant risks

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

war international finance and fiscal capacity in the long run in this article i revisit the relationship between war and state making in modern times by focusing on two prominent types of war finance taxes and foreign loans financing war with tax money enhances the capacity to assess wealth and monitor compliance namely fiscal capacity tax financed war facilitates the adoption of power sharing institutions which transform taxation into a non zero sum game carrying on the effect of war in the long run financing war with external capital does not contribute to long term fiscal capacity if borrowers interrupt debt service and as part of the default settlement war debt is condoned or exchanged for nontax revenue the empirical evidence draws from war around the world as early as 1816 results suggest that globalization of capital markets in the nineteenth century undermined the association between war state making and political reform

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

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

labor markets and adjustment in open asian economies the republic of korea and malaysia this article deals with the adjustment following external shocks in two open asian economies the republic of korea and malaysia there were important differences in the economic structure of the two countries as well as significant differences in the way external events produced crises that interrupted their dynamic economic growth detailed analyses of economic cycles in the two decades preceding 1987 88 show that the behavior of factor markets particularly the markets for labor and foreign exchange helped korea to adjust quickly to the shocks but in malaysia actually caused the crisis to deepen for economies heavily dependent on exports the unit cost of labor in dollars is of central importance as an index of the competitiveness of exports and hence of their ability to mount a sustained recovery after a difficult period accordingly the heart of the analysis is the determination of the unit cost of labor and the factors affecting its change throughout the cycles concentration on this critical variable helps to spotlight the crucial differences in the factor markets of the two economies

inflationary finance under discrepion and rules inflationary finance involves first the tax on cash balances from expected inflation and second a capital levy from unexpected inflation from the standpoint of minimizing distortions these capital levies are attractive ex post to the policymaker in a full equilibrium two conditions hold 1 the monetary authority optimizes subject to people s expectations mechanisms and 2 people form expectations rationally given their knowledge of the policymaker s objectives the outcomes under discretionary policy are contrasted with those generated under rules in a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices under an enforced rule it becomes possible to make some guarantees hence the links between monetary actions and inflationary expectations can be internalized there is a distinction between fully contingent rules and rules of simple form a simple rule allows the internalization of some connections between policy act ion and inflationary expectations but discretion permits some desirable flexibility of monetary growth this abstract was borrowed from another version of this item

the liquidation of government debt high public debt often produces the drama of default and restructuring but debt is also reduced through financial repression fr a tax on bondholders and savers via negative or below market real interest rates after world war ii capital controls and regulatory restrictions created a captive audience for government debt limiting tax base erosion fr is most successful in liquidating debt when accompanied by inflation for the advanced economies real interest rates were negative half of the time during 1945 80 average annual interest expense savings for a 12 country sample range from about 1 to 5 of gdp for the full 1945 80 period we suggest that once again fr may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies

comparative politics and public finance we propose a model with micropolitical foundations to contrast different political regimes compared to a parliamentary regime the institutions of a presidential congressional regime produce fewer incentives for legislative cohesion but more separation of powers these differences are reflected in the size and composition of government spending a parliamentary regime has redistribution toward a majority less underprovision of public goods and more rents to politicians a presidential congressional regime has redistribution toward powerful minorities more underprovision of public goods but less rents to politicians the size of government is smaller under a presidential regime this last prediction is consistent with cross country data

contagion effects of sovereign credit rating revisions on the real economy is it trade or finance we analyse the contagion effects of sovereign credit rating revisions on the real economy with particular emphasis on the intensity of trade and finance channels our findings show that event coun

the mystery of the printing press monetary policy and self fulfilling debt crises we study the mechanism by which unconventional balance sheet monetary policy can rule out self fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers by purchasing sovereign debt the central bank e ectively swaps risky government paper for monetary liabilities only exposed to inflation risk thus yielding a lower interest rate we characterize a critical threshold for central bank purchases beyond which absent fundamental fiscal stress the government strictly prefers primary surplus adjustment to default since default may still occur for fundamental reasons however the central bank faces the risk of losses on sovereign debt holdings which may generate ine cient inflation this risk does not undermine the credibility of a backstop nor the ability of a central bank to pursue its inflation objectives when the latter enjoys fiscal backing or fiscal authorities are su ciently averse to inflation

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

sovereign debt and financial crises theory and historical evidence this issue of the journal of the european economic association presents papers from the october 2014 conference on sovereign debt crises organized by sebnem kalemli ozcan carmen reinhart and ken rogoff this project arose from the need to provide rigorous research on the topic the so called great contraction in the world s advanced economies is the most severe and synchronized global nancial crisis since the great depression it has forced all concerned parties to reassess the roles played by public and private debt as well as the importance of international nancial linkages nations in the european union continue to struggle with a crisis over the debts of periphery countries most notably greece but also ireland spain portugal and italy the failure ofmost advanced countries to recover or to regain precrisis levels of employment and growth in its aftermath raises fears of experiencing the equivalent of japan s lost decade in the wake of the crisis it is clear that the macroeconomic models previously used by central banks and others have severe limitations in particular thesemodels do not adequately incorporate nancial frictions and are almost always estimated over relatively narrow data sets that do not span nancial crises the recent crisis also raises many other issues including the links among government and private sector debt the nancial sector and the political processes governing the resolution of scal and nancial distress the papers in this volume address three key issues

historical research on international lending and debt the parallels between debt crises past and present have attracted a large number of social scientists to the history of foreign lending and default in this article i describe the findings of the recent literature on the subject the questions posed have obvious relevance to the current policy debate over the debt of less developed countries what features of international capital markets have long rendered them vulnerable to generalized crisis what events tend to spawn debt servicing difficulties and to provoke default what have been the consequences of default for lenders and borrowers what approaches historically have proven most effective at clearing away the residue of debt crises i concentrate on 20th century experience on the lending of the 1920s on the debt crisis of the 1930s and on the recovery of capital markets after world war ii

foreign law bonds can they reduce sovereign borrowing costs abstract governments often issue bonds in foreign jurisdictions which can provide additional legal protection vis a vis domestic bonds this paper studies the effect of this jurisdiction choice on bond prices we test whether foreign law bonds trade at a premium compared to domestic law bonds we use the euro area 2006 2013 as a unique testing ground controlling for currency risk liquidity risk and term structure foreign law bonds indeed carry significantly lower yields in distress periods and this effect rises as the risk of a sovereign default increases these results indicate that in times of crisis governments can borrow at lower rates under foreign law

some international evidence on the lucas supply function abstract we provide empirical evidence on the lucas supply function based on actual inflation surprises for 19 industrial economies our results show that the inflation surprise positively correlates with the output gap and that this relationship is negatively related to inflation variability

equity concern and the political economy of protection in new zealand a number of empirical models have found protection to be greatest for industries employing poorly skilled low paid workers this has caused some economists notably robert baldwin to suggest that equity concern by politicians in an alternative to the interest group hypothesis this paper reports the result of a test on new zealand data that shows that this equity concern is absent for industries with few employees or firms equity concern variables were only important for industries with many employees and firms this suggests that equity concern is selective and may be reconcilable with self interest motivations

sovereign states bondholders committees and the london stock exchange in the nineteenth century 1827 68 new facts and old fictions this paper unpacks the role of foreign bondholders committees in influencing market access following a default during the era before the creation of the british corporation of foreign bondholders cfb in 1868 i argue that many ideas about this period need to be revisited in particular my evidence which uses archival work to describe market microstructures shows the importance of the london stock exchange lse as a court of arbitration i show how the lse general purpose committee set up a system of collective action clauses requiring majority agreement among bondholders to permit market access i argue that unlike what research has argued thus far this created powerful incentives for bondholders to get organized as they did previous models and historical lessons need to be recast copyright 2013 oxford university press

the effects of systemic banking crises in the inter war period abstract this paper examines the time profile of the impact of systemic banking crises on gdp and industrial production using a panel of 24 countries over the inter war period and compares this to the post war experience of these countries we show that banking crises have effects that induce medium term adjustments on economies focussing on an eight year horizon it is clear that the negative effects of systemic banking crises last over the entirety of this time horizon the effect has been identified for gdp and industrial production the adverse effect on the industrial sector stands out as being substantially larger in magnitude relative to the macroeconomic effect comparing the results across long run historical periods for the same selection of countries and variables identifies some differences that stand out the short term macroeconomic impact effects are much larger in the post war period suggesting that the propagation channels of shocks operate at a faster pace in the more recent period moreover the time profile of effects differs suggesting that modern policies may be modulating the temporal shape of the response to banking crises shocks however the broad magnitude of the adverse effect of banking crises remains comparable across these time periods

the case for trade liberalization in developing countries in a broad swing of the pendulum developing countries have been shifting from severe and destructive protection to free trade fever many of the notable examples are in latin america mexico after a major unilateral trade liberalization is now negotiating a free trade agreement with canada and the united states chile traditionally a highly protected country is a leading example of reducing trade barriers argentina and brazil have entered free trade agreements a free trade area for the americas is becoming a serious possibility the enthusiasm for more openness of the economy is not limited to latin america for example korea and turkey are cases of highly successful liberalization there are also cases in africa for example ghana and botswana to demonstrate the possibility and the benefits of opening up this new enthusiasm for freer trade stems from four overlapping sources anti statism the world has seen a broad intellectual swing away from emphasizing the beneficial role of the state in the 1980s and protection is seen as one of the manifestations of an overly intrusive state of course a shift to a liberal trade regime has not always been the by product of a more democratic society chile under pinochet or korea in its liberalizing phase were under authoritarian rule two cheers for the market but not three the saying goes today the market gets at least three cheers which may be at least one too many poor economic performance many developing countries have suffered dismal economic performance and declining productive potential much of the reason can be traced to populist macroeconomic policies that engendered debt crises and hyperinflation of course part of the reason was also a very adverse external environment but since the days of plentiful external credit are gone

inflation default and sovereign debt the role of denomination and ownership abstract emerging market governments hold mixed debt portfolios they borrow at home and abroad in both nominal and real terms this paper incorporates such a mixed debt structure into a theory of sovereign debt default and inflation the government optimally uses both default and inflation to balance its budget the portfolio structure affects the relative benefits of inflation default and incentives to accumulate debt a calibrated version of the model can account for key features of the mexican economy we use the model to study if portfolio shifts away from purely real and external debt contributed to emerging market disinflation in the mid 1990s we find that the answer depends on the distinction between ownership and denomination increasingly nominal debt is inflationary if held abroad but lowers inflation if held at home

international evidence on a new keynesian theory of the output inflation trade off this article provides empirical evidence on the validity of a new keynesian theory of the output inflation tradeoff the theory offered by laurence ball n gregory mankiw and david romer 1988 synthesizes recent work on menu costs and imperfect competition used to ground keynesian theory in maximizing behavior the present paper focuses on a key prediction namely that higher average inflation makes output less sensitive to nominal shocks that proposition is tested using data for each of forty three countries importantly average inflation is found to have the predicted effect in a significant fraction of those countries an outcome which supports the new keynesian view copyright 1991 by ohio state university press

market structure and political influence new data on political expenditures activity and success this paper utilizes new data to evaluate the determinants of the political influence of thirty five manufacturing industries on the u s congress during 1976 80 several measures of influence serve to distinguish between political activity and success seller concentration and geopolitical dispersion increase both activity and success but neither industry size nor leading firm size proves significant we test whether political expenditures facilitate obtaining the favors conferred on an industry by its market structure or by influence independent of that strurture statistical inference strongly confirms both roles

optimal maturity of nominal government debt an infinite horizon model the role of debt maturity is analyzed in a framework that blends tax smoothing with time inconsistency of optimal policy when policymakers have an incentive to use unanticipated inflation to reduce the real value of nominal government liabilities three conclusions emerge 1 nominal debt leads policymakers to resort to inflation even though in equilibrium inflation collects no revenue 2 when under full precommitment the optimal policy calls for complete tax smoothing and a constant debt level the equilibrium policy without precommitment calls for anticipating tax collection and early debt repayment and 3 management of debt maturity is an essential component of the equilibrium policy copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

modern hyper and high inflations since 1947 hyperinflations by cagan s definition in market economies have been rare much more common have been longer inflationary processes with inflation rates above 100 percent per annum based on a sample of 133 countries and using the 100 percent threshold as the basis for a definition of very high inflation episodes this paper examines the main characteristics of such inflations among other things we find that i close to 20 percent of countries have experienced inflation above 100 percent per annum ii higher inflation tends to be more unstable iii in high inflation countries the relationship between the fiscal balance and seigniorage is strong both in the short and long run iv inflation inertia decreases as average inflation rises v high inflation is associated with poor macroeconomic performance and vi stabilizations from high inflation that rely on the exchange rate as the nominal anchor are expansionary

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

state market civil institutions the case of eastern europe and the soviet republics abstract the transition tasks facing the countries of central and eastern europe are monumental the public sector will play a dominant role during the transition process available evidence suggests that orthodox prescriptions for public sector reform cannot be effectively implemented without an underlying constitution and a legal and regulatory infrastructure lri a well designed constitution and lri instill confidence and policy credibility with perfectly rational expectations and confidence in the constitution and lri the sequence of reforms matters little future reforms are perfectly anticipated today and agents act as though the reforms will occur with certainty short of such confidence reforms need to be simultaneously pursued on many fronts the most important activity is to redefine the role of the state setting a constitution that clearly defines and secures basic political civil and economic freedoms and designing an lri that creates a fertile environment for a vibrant market economy

fiscal consolidation and financial reforms we use a rare events logistic regression model as well as traditional probit and logit models to investigate the impact of fiscal consolidation on the likelihood of financial reforms for a panel of 17 countries over the period 1980 2005 we show that large austerity plans mainly implemented through spending cuts rather than tax hikes promote financial reforms by considering reforms affecting specific areas of the financial sector we find that the banking sector reforms and domestic finance reforms are more likely to occur when fiscal adjustments are put in place interestingly while banking sector reforms are mainly prompted during periods of tax driven consolidations spending cuts driven consolidation packages seem to propel the implementation of domestic finance reforms finally we show that higher inflation lower degree of trade openness a deterioration of financial conditions and to some extent a fall in the degree of competitiveness enhance the probability of financial reforms

the stock of external sovereign debt can we take the data at face value abstract the stock of sovereign debt is typically measured at face value defined as the undiscounted sum of future principal repayments face values are misleading when debts are issued with different contractual forms or maturities in this paper we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity we show that our alternative measures 1 paint a very different quantitative and in some cases also qualitative picture of the stock of developing country external sovereign debt 2 often invert rankings of indebtedness across countries which historically defined eligibility for debt forgiveness 3 indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50 once model consistent measures of debt are used 4 show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts and 5 illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values

sovereign risk interbank freezes and aggregate fluctuations abstract this paper shows how spillovers from sovereign risk to banks access to wholesale funding establish a bank sovereign nexus in a dynamic stochastic general equilibrium set up heterogeneous banks give rise to an interbank market where government bonds are used as collateral government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops these spillovers by impeding interbank intermediation lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy the model is calibrated using greek data and is capable of reproducing stylized facts from the european sovereign debt crisis in an application we show that the ecb s non standard financing operations mitigate the adverse feedback mechanism

an updated assessment of the lucas supply curve and the inflation output trade off abstract previous work assessing the results of lucas lucas r 1972 expectations and the neutrality of money journal of economic theory 4 103 124 and the inflation output trade off is updated by incorporating recent data avoiding spurious regressions and bootstrapping results the relationship hypothesized by lucas is reinforced but mean inflation results are inconclusive

the dynamics of negotiated protectionism r ecent protectionism by the united states has principally taken the form of negotiated barriers to trade such as voluntary export restraints these barriers tend to evolve over time and to display three patterns which we label institutionalized temporary and sporadic protectionism cartel theory and studies of the politics of protection suggest that the dynamics of negotiated protectionism will depend on three variables the barriers to entry into an industry the size of the domestic industry and the exit barriers for domestic firms low barriers to entry will lead to institutionalized protectionism when the domestic industry is large and exit difficult temporary protectionism results when the domestic industry is small and exit easy and sporadic protectionism is likely when barriers to entry are high brief studies of u s protectionism in textiles and apparel steel footwear televisions and automobiles illustrate the value of this framework t rade protectionism has often been thought of as a unilateral act by a sovereign state yet much protectionism during the 1970s and 1980s has been negotiated rather than unilaterally imposed voluntary export restraints vers and similar arrangements have become the preferred means by which the united states has sought to cartelize industrial sectors threatened by imports such negotiated protectionism has been particularly evident in five industries in the united states during part or all of the last quarter century in textiles and apparel steel footwear television sets and autos the united states has negotiated trade restrictions with numerous foreign exporters while the u s government has occasionally provided unilateral measures of protection for small industries all u s administrations since world war ii have been reluctant to countenance general schemes of protection for major industries yet beginning with the eisenhower administration s negotiations in textiles in 1956 virtually every u s president has actively sought vers for economically and politically sensitive industrial sectors

reserve requirements and the inflation tax the inflation tax on currency and required bank reserves is modeled in a general equilibrium setting by specifying a transactions technology in which currency and demand deposits allow agents to economize on time spent transacting in the goods market revenue maximizing conditions for the nominal interest rate and reserve ratio are analyzed for any given revenue requirement less than the revenue maximizing level minimization of the welfare costs of inflationary finance results in the choice of a combination of the interest rate and reserve ratio that lies on a set of tangency points formed by iso revenue and iso welfare curves copyright 1989 by ohio state university press

currency matters analyzing international bond portfolios abstract bonds denominated in the investor s currency are special we show this indirectly in a global dataset of bilateral bond holdings indirectly because the global holdings dataset does not differentiate by currency denomination and then more directly in datasets of us holdings of foreign bonds that do differentiate by currency we find that the share of a country s bonds denominated in investors currencies is an important determinant of the amount of cross border investment it receives factors associated with greater or less cross border investment in bonds differ by currency denomination and one phenomenon of international portfolios the ever present home bias in some cases actually disappears when bonds are denominated in the investor s currency suggesting that the home bias is to some extent a home currency bias