a seniority arrangement for sovereign debt a sovereign s inability to commit to a course of action regarding future borrowing and default behavior makes long term debt costly the problem of debt dilution one mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts in the event of default creditors are to be paid off in the order in which they lent the absolute priority or first in time rule in this paper we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default jel e32 e44 f34 g15 h63 o16 o19

global factors and emerging market spreads this paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite as reflected in the spread of high yield corporate bonds in developed markets global liquidity measured by the international interest rates and contagion from systemic events like the russian default this link has remained relatively stable over the history of the emerging market class is robust to the inclusion of country specific factors and helps provide accurate long run predictions overall the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies

a review of policy drivers and barriers for the use of anaerobic digestion in europe the united states and australia anaerobic digestion ad of biomass has become a common technology used in many european nations and is receiving increased attention in other nations the chief attraction of ad is it generates renewable energy yet it also manages and treats organic waste recycles key nutrients to soil and can create local jobs making ad an attractive technology to governments in this paper we review the role government policy has played in promoting ad use and driving its growth in five developed nations studied australia denmark germany the uk and usa these nations were chosen for review as they provide a breadth of ad use with the number of ad plants in the aforementioned nations totaling 78 114 9545 265 and 1497 this review looks to demonstrate and discuss policy mechanisms introduced by each nation that has helped drive ad use and identify areas where policy can help overcome enduring challenges that face the ad industry focused discussion is given to waste management climate change and energy security policies and to financial incentives made available to ad installations analysis shows that the impact of performance based incentives targeted at small medium capacity ad plants less than 500 kw have a significant positive correlation with the growth of ad use in the uk and germany the relatively new ad industry faces a number of barriers which are also discussed but with the help of supportive government policy for the technology that considers the wide ranging benefits of ad across government portfolios investors will be more likely to show interest in the developing ad industry

planning of renewables schemes deliberative and fair decision making on landscape issues instead of reproachful accusations of non cooperation abstract the main issues related to successful implementation policies concern the socio economic institutions that are conditional to planning in the energy policy domain but also in the domain of spatial planning successful investments and the siting of renewable power plants eventually determine the success rate of national efforts in establishing renewable capacity central planning usually has several objectives and these often have a detrimental effect on the goal of renewable energy application current problems related to implementation decisions concerning wind power schemes are an example to those who will be faced by other renewable power plants notably biomass regarding community acceptance of wind power schemes the visual evaluation of the impact of wind power on the values of the landscape is by far the most dominant factor in explaining opposition or support type of landscape fully overshadows other attitudinal attributes as well as other visual and scenic factors such as the design of wind turbines and wind farms and the number and the size of turbines planning regimes and decision making practices that really enhance the implementation processes of renewable energy require strong ecological modernization this means institutional changes that create involvement and trust of actors at the actual implementation level local opposition cannot be explained by the egotistical motives of local residents when the inclination to behave according to supposed backyard motives is investigated the scale to measure this phenomenon appears to indicate commitment to equity issues and fairness of decision making hence for wind power local involvement to represent the local values of site specific landscapes is crucial for other renewables the source specific features are different but conflicts can be expected as well because the fairness of implementation decisions will be equally significant

the nature of option interactions and the valuation of investments with multiple real options this paper deals with the nature of option interactions and the valuation of capital budgeting projects possessing flexibility in the form of multiple real options it identifies situations where option interactions can be small or large negative or positive interactions generally depend on the type separation degree of being in the money and the order ofthe options involved the paper illustrates through a generic example the importance of properly accounting for interactions among the options to defer abandon contract or expand in vestment and switch use it is shown that the incremental value of an additional option in the presence of other options is generally less than its value in isolation and declines as more options are present therefore valuation errors from ignoring a particular option may be small however configurations of real options exhibiting precisely the opposite behavior are identified comparative statics results confirm that the value of flexibility despite interactions manifests familiar option properties

how should control theory be used to calculate a time consistent government policy we study different solutions to a simple one dimensional linear quadratic game with a large number of private agents and a government a time consistent solution is defined as a solution to the hamilton jacobi bellman equation i e as a policy for which the government has noprecommitment capability this solution is compared to a policy where the government has an instantaneous pre commitment i e an equilibrium in which the government has a period by period leadership in both cases we show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature

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

local acceptance of renewable energy a case study from southeast germany the european 20 20 20 goals as well as national targets for the next decade require a substantial increase in installed renewable capacity in germany while public support for such measures is high on an abstract level the situation in the local context is often very different here the impact of renewable energy might cause resistance empirical research shows that a community ownership model can have a positive effect on local acceptance our study explores whether such an effect can also be demonstrated in a community co ownership model the question is relevant since larger projects exceed the financial possibilities of most communities leaving them with only co ownership as an option the research design is based on a comparative case study utilizing a questionnaire based survey the results of the survey clearly show that a significant difference in local acceptance exists between the two cases the residents of zschadras where a community co ownership model exists are consistently more positive towards local renewable energy and also towards renewable energy in general the results provide evidence that the co ownership model is a means to reconcile local acceptance with an increased use of renewable energy in germany

debt relief and adjustment effort in a multi period model abstract this paper shows that if the period following the granting of debt relief is taken into account debt relief increases adjustment effort investment irrespective of whether there is an initial debt overhang or not

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

news sovereign debt maturity and default risk abstract leading into a debt crisis interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity suggesting that news about future economic developments may play an important role in these episodes an empirical var estimation shows that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity a quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical var estimates the dynamics of the economy after a bad news shock share some features of a productivity shock and some features of sudden stop events however unlike during sudden stop episodes long term debt does not shield the country from bad news shocks and it may even exacerbate default risk finally an increase in the precision of news allows the government to improve its debt maturity management especially during periods of high stress in credit markets and thus face lower yield spreads while increasing the amount of debt

the case for gdp indexed bonds gds indexed bonds this paper seeks to revive the case for countries to insure against economic growth slowdowns by issuing bonds indexed to the rate of growth of gdp we show that gdp indexed bonds could provide substantial benefits in reducing the likelihood of default crises and allowing countries to avoid pro cyclical fiscal policies we simulate the effects of gdp indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood of debt gdp paths becoming explosive the insurance premium would likely be small because cross country comovement of gdp growth rates is low and cross country gdp growth risk is thus largely diversifiable for an investor holding a portfolio of gdp indexed bonds potential obstacles to the emergence of a market for these bonds include the verifiability of gdp data the trade off between insurance and moral hazard and the need for liquidity theory and past experience suggest that financial innovation often requires official intervention and its timing and form are difficult to predict we discuss institutional fixes and suggest an approach for attempting to start up a market eduardo borensztein and paolo mauro

the debt overhang and the disincentive to invest abstract this paper is an attempt to explore the debt overhang hypothesis by an empirical examination of the investment experience of 13 severely indebted countries it begins with a discussion of the disincentive effect of debt overhang which is linked to some aspects of the adjustment measures that these countries are undergoing viz devaluation and reduction in public sector deficits this is followed by empirical analysis which demonstrates that first in countries with a debt overhang external debt captures many of the effects of other explanatory variables that traditionally explain investment second through 1971 1991 the relationship between external debt and investment is consistently a negative one however the first half of the period has strong time influences that exercise a positive influence on investment in the second half of the period time effects turn negative too thus explaining the fall in investment levels observed after 1982

uncertainty economic reforms and private investment in the middle east and north africa during the 1980s and the 1990s private investment in the middle east and north africa mena has on average shown a decreasing or stagnant trend this contrasts with the situation of the asian economies where private investment has always been more dynamic in this paper it is empirically shown for a panel of 39 developing economies among which four mena countries that in addition to the traditional determinants of investment such as the growth anticipations and the real interest rate government policies explain mena s low investment rate insufficient structural reforms which have most of the time led to poor financial development and deficient trade openness have been a crucial factor for the deficit in private capital formation the economic uncertainties of the region have represented another factor of the firm s decisions not to invest these uncertainties have consisted of the external debt burden and various measures of volatility

non defaultable debt and sovereign risk abstract we quantify gains from introducing limited financing through non defaultable debt into a model of equilibrium sovereign risk for an initial sovereign spread of 4 2 introducing the possibility of issuing non defaultable debt for up to 10 of aggregate income reduces immediately the spread to 1 5 and implies a welfare gain equivalent to a permanent consumption increase of 0 8 nevertheless the spread reduction achieved by the introduction of non defaultable debt is short lived our findings shed light on different aspects of proposals to introduce common euro area sovereign bonds that could be virtually non defaultable

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

damned if you do damned if you don t an option value approach to evaluating the subsidy of the cpr mainline we revisit the excess subsidy granted to the cpr for the first transcontinental railway in 1881 previous studies have evaluated the subsidy from an ex post perspective and concluded that it was too large we argue that the subsidy should be evaluated from an ex ante perspective which explicitly accounts for uncertainty using an option value approach which takes account of the risk and irreversibility of the investment we show that it is likely that the subsidy was not excessive at all but rather was required to compensate the cpr for forgoing the option to construct the line at the privately optimal time in the future

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

large external debt and slow domestic growth a theoretical analysis abstract this paper analyzes the optimal rescheduling strategy of lenders whose claims on a country show a discount on the secondary markets the paper shows that lenders should proceed as follows they should split the debt into two components a performing and a nonperforming part they should act as if the debt amounted to the performing part and scale down how much money the borrower should service on that part only as a result it is shown that the efficient servicing of the debt crowds in investment the paper relates this result to the debt overhang argument according to which too large a nominal claim may reduce investment and the market value of the debt

wind power implementation the nature of public attitudes equity and fairness instead of backyard motives abstract public attitudes anywhere in europe show moderate to strong support for the implementation of renewable energy nevertheless planning wind power developments appears to be a complicated matter in most countries the problems that have to be dealt with during decision making processes on the siting of wind turbines are usually referred to as mere communication problems however public attitudes towards wind power are fundamentally different from attitudes towards wind farms this gap causes misunderstandings about the nature of public support for renewables in particular where planners easily assume support for renewables can be generated by information campaigns emphasising the environmental benefits whereas opposition to renewable energy schemes can be explained by a selfish not in my backyard attitude both explanations used by planners authorities and unfortunately by many scholars are falsified furthermore policies that still take this common knowledge for granted can have negative consequences for the implementation rates of renewables visual evaluation of the impact of wind power on landscape values is by far the dominant factor in explaining why some are opposed to wind power and others are supporting it moreover feelings about equity and fairness appear the determinants of backyard motives instead of selfishness

low investment and large ldc debt in the 1980s this paper aims at disentangling the correlation between ldc debt and investment in the 1980s the author shows that a large debt was not an unconditional predictor of low investment in the 1980s nor was investment abnormally low when compared to a financial autarky rate calculated in the text he does find however that the actual service of the debt crowded out investment for the rescheduling countries he shows that 1 percent of gdp paid abroad reduced domestic investment by 0 3 percent of gdp this is identical to the correlation between investment and foreign finance observed in the 1960s copyright 1993 by american economic association

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

solving the feldstein horioka puzzle with financial frictions unlike the prediction of a frictionless open economy model long term average savings and investment rates are highly correlated across countries a puzzle first identified by feldstein and horioka 1980 we quantitatively investigate the impact of two types of financial frictions on this correlation one is limited enforcement w here contracts are enforced by the threat of default penalties the other is limited spanning where the only asset available is noncontingent bonds we find that the calibrated model with both frictions produces a savings investment correlation and a volume of capital flows close to the data to solve the puzzle the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data and the limited spanning friction needs to exogenously restrict capital flows to the observed level when combined the two frictions interact to endogenously restrict capital flows and thereby solve the feldstein horioka puzzle

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

optimal timing of decisions a general theory based on continuation values abstract by extending a methodology dating back to jovanovic 1982 we develop a comprehensive theory of optimal timing of decisions based on continuation value functions and operators that act on them rewards can be bounded or unbounded one advantage of this approach over standard bellman methods is that continuation value functions are smoother than value functions another is that for a range of problems the continuation value function exists in a lower dimensional space than the value function we exploit these advantages to obtain a range of new results on optimality optimal behavior and efficient computation

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

a contraction for sovereign debt models abstract using a dual representation we show that the markov equilibria of the one period bond eaton and gersovitz 1981 incomplete markets sovereign debt model can be represented as a fixed point of a contraction mapping providing a new proof of the uniqueness and existence of equilibrium in the benchmark sovereign debt model the arguments can be extended to incorporate re entry probabilities after default when the shock process is iid our representation of the equilibrium bears many similarities to an optimal contracting problem we use this to argue that commitment to budget rules has no value to a benevolent government we show how the introduction of long term bonds breaks the link to the constrained planning problem

taking an option on the future subsidizing biofuels for energy security or reducing global warming abstract this paper examines the biofuels industry from a policy and international trade perspective across the globe there are two main public policy objectives driving the development of biofuels industries improving energy security and reducing global warming the us and canadian governments have respectively fostered biofuels industries for these reasons as biofuels industries will not be financially viable without government support in the foreseeable future government policies can be interpreted as taking options on the future a theoretical model is developed using option value theory to determine whether the same governmental policy subsidization can lead to different levels of optimal subsidies in each country where the subsidy policy is driven by two distinct motivating factors if the reason subsidy levels differ is structural the likelihood of a trade dispute arising increases

debt relief investment and growth from 1989 to 2004 the donor community provided approximately 400 billion in debt relief to developing countries in an attempt to promote growth and reduce poverty using a sample of 118 developing countries this paper empirically assesses the impact of debt relief on growth via 1 resources made available for investment from reduced debt service payments and 2 improved incentives to invest from a reduced debt stock although the results show no general evidence of a growth effect from debt relief the study provides certain evidence that it promotes investment and thereby growth in countries not classified as hipcs

a turbine is not only a turbine the role of social context and fairness characteristics for the local acceptance of wind power to gain acceptance for renewable energy production sites it is not sufficient to develop the appropriate technology without taking the social context and fairness concerns into account using a factorial survey experiment we investigate the influence of both on the local acceptance of wind turbine developments in germany and poland two countries differing in installed wind power capacity respondents were surveyed with hypothetical situations describing the construction of wind farms varying in the opportunity to participate in the planning process participatory justice the distribution of turbines across regions distributive justice and ownership among other characteristics we find higher acceptance levels in poland than in germany respondents in both countries are willing to accept new turbines in their vicinity if they can participate in decision making the turbines are owned by a group of citizens and if the generated electricity is consumed in the region instead of being exported overall participatory justice is more important than distributive justice confirming previous results we also find that respondents who already have turbines in their vicinity show higher acceptance levels than those who are not yet affected thus the negative externalities are likely to be overestimated in the planning and implementation process

to give or to forgive aid versus debt relief is generalized debt relief an effective development strategy or should assistance be tailored to countries characteristics to answer this question the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief since offering such a menu is costly it is preferred by donors only when the cost of assistance is low and the probability that an indebted country is creditworthy is high enough for lower probabilities and higher costs of assistance donors prefer a policy of only debt relief very limited aid is the preferred policy only for high costs of assistance and low probabilities that the government is creditworthy

sovereign default resolution through maturity extension abstract sovereign default episodes are resolved by restructuring the debt through renegotiations and implemented by bond swaps and resumption of debt service payments this process provides debt relief for the sovereign and partially compensates lenders for their losses in the data the bulk of such debt relief is implemented by extending the maturity of the debt rather than changing its face value we augment a standard maturity choice model with a post default renegotiation phase and study whether it can replicate this observed maturity extension the model is successful in generating this and other key features of renegotiations and maturity choice but critically only when we assume that sovereigns continue to be excluded temporarily from financial markets after renegotiation consistent with the observation that countries do not immediately resume borrowing in contrast a version of the model where market access is restored promptly features a counterfactual reduction in maturity a puzzle for the standard model

willingness to accept local wind energy development does the compensation mechanism matter wind power development projects often include compensation for the affected communities but little is known about the efficacy of the alternative compensation mechanisms this study addresses this question by examining the relative potential of private and public compensation we conduct a choice experiment ce that investigates household preferences of compensation for the local siting of a hypothetical wind park households chose among different alternatives where each alternative was characterized by three varying attributes the number of turbines the level of private compensation and the level of public compensation results indicate the wind park imposes welfare losses to local residents and non local recreational users with about 35 of these losses corresponding to non use values findings show that households prefer public compensation to private compensation with household s willingness to accept being lower with public compensation than private compensation this finding suggests that estimates of local resistance to wind development depends on the compensation mechanism

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

performance pricing in bank debt contracts abstract performance pricing links bank debt interest rate spreads to a borrower s performance via two options interest decreasing performance pricing reduces spreads if credit quality improves it is more common when prepayment is more likely or costly and when adverse selection costs are higher and is less common when multiple performance measures better predict credit quality interest increasing performance pricing increases spreads if credit quality deteriorates it is more common when lenders reduce interest rates to add this provision when downgrades are more likely and when moral hazard costs are higher we find lower spreads for contracts with interest increasing performance pricing

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

the relationship between turkey s foreign debt and economic growth an asymmetric causality analysis tackling foreign debt that arises as a result of limited and ineffective use of resources is an item that remains on the agenda particularly for developing countries in this study we examine the

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

barriers to investment in polarized societies i present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short sighted policies the relative price of investment to consumption is excessively large in equilibrium due to over taxation investment rates are too low which slows down growth along the transition in the long run this results in output consumption and welfare being inefficiently low the larger is the degree of polarization the greater is the inefficiency political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth retarding policies

pricing growth indexed bonds abstract growth indexed bonds have been suggested as a way of reducing the procyclicality of emerging market countries fiscal policies and the likelihood of costly debt crises investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle in an effort to reduce such concerns this article presents a simple way of pricing growth indexed bonds as a pleasant by product the analysis tracks the quantitative implications of an increase in the share of growth indexed bonds in total debt measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

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

stabilising economic growth through risk sharing macro instruments the risk sharing principles of islamic finance have ironically been studied and used extensively outside the muslim world the development of early european city states was founded on the risk sharing principle the risk sharing financing helped these city states to develop their infrastructure and rule the scientific and economic landscape of the west the western financial system of today still carries traces of risk sharing in the form of venture capital financing albeit the primary focus has diverted to risk shifting based debt financing over the past decades much effort and research has gone into establishing a viable set of islamic financial institutions most muslim nations are heavily indebted with high reliance on multilateral financing primarily based on high interest rates this vicious cycle of interest rates and debt has stunted the growth of these nations and worsened the conditions of the masses this research brings to the forefront the concept of an equity in nature gdp linked paper which allows for enhanced risk sharing based sovereign financing it aims to present empirical proof of the stability this instrument offers in economic growth for a large sample of developing economies comprising bulk of islamic countries while analysing the empirical work a strong favourable argument for this instrument is derived for its benefits in stability through this study we endeavour to initiate a thought provoking and practical discussion for further development of these instruments for the betterment of developing countries

endogenous borrowing constraints with incomplete markets this article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models we allow the constraints to depend on an investor s characteristics such as time preference risk aversion and income streams the proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default using a numerical algorithm we find that for an array of structural parameters the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies

domestic taxes and the external debt laffer curve this paper highlights the role of the domestic tax system in determining the economic consequences of an external debt overhang the analysis indicates that fairly strong and probably unrealistic assumptions about the domestic tax system are needed to argue that the investment disincentives associated with the debt overlhang are large enough to place a country on the wrong side of the debt laffer curve a simple taxation scheme is specified and it is shown that a country can be on the wrong side of its debt laffer curve only if it is on the wrong side of its tax laffer curve

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

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

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

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

rollover risk and market freezes the debt capacity of an asset is the maximum amount that can be borrowed using the asset as collateral we model a sudden collapse in the debt capacity of good collateral we assume short term debt that must be frequently rolled over a small transaction cost of selling collateral in the event of default and a small probability of meeting a buy to hold investor we then show that a small change in the asset s fundamental value can be associated with a catastrophic drop in the debt capacity the kind of market freeze observed during the crisis of 2007 to 2008 one of the many striking features of the crisis of 2007 to 2008 was the sudden freeze in the market for the rollover of short term debt from an in stitutional perspective the inability to borrow overnight against high quality but long term assets was a market failure that effectively led to the demise of a substantial part of investment banking in the united states more broadly it led to the collapse in the united states the united kingdom and other countries of banks and other financial institutions that had relied on signifi cant maturity mismatch between assets and liabilities and in particular on the rollover of short term wholesale debt in the asset backed commercial paper abcp and overnight sale and repurchase repo markets in this paper we are interested in developing a model of a sudden collapse in the ability to borrow short term against long lived assets in the absence of obvious problems of asymmetric information or fears about the value of col lateral we refer to this phenomenon as a market freeze more precisely a market freeze occurs when the debt capacity the maximum amount of collat eralized borrowing that can be supported by an asset is a small fraction of the fundamental value the economic value measured by the net present value npv of the stream of future returns an extreme form of a market freeze occurs when the fundamental value is close to the maximum possible value of the asset whereas the debt capacity is close to the minimum possible value of the asset

lending constraints real estate prices and business cycles in emerging economies abstract we investigate a small open economy with constraints in both the domestic and the international credit market the informational opaqueness of the domestic market hinders foreign lenders activity so that entrepreneurs face looser borrowing constraints vis a vis domestic financiers however limited capitalization constrains domestic lenders calibrating the model to data from argentina we find that the interaction between lending and borrowing constraints is a channel through which real interest rate shocks generate fluctuations in output real estate prices and consumption external financial liberalization increases volatility and affects welfare more than domestic liberalization but also mitigates the destabilizing impact of domestic deregulation

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

fiscal rules and government borrowing costs international evidence we find that the adoption of numerical fiscal rules reduces government borrowing costs in a sample of 101 advanced and developing countries for 1985 2010 we apply a variety of propensity score matching methods to address the self selection problem of policy adoption and find strong evidence that fiscal rules have large and significant treatment effects on lowering government borrowing costs in both international and domestic financial markets the results are robust to changes in country sample and alternative estimation methodology and are consistent with fiscal rules helping to build policy credibility by reducing the probability of default and the risk premium on government debt that compensates lenders for this possibility jel e43 g12 h60

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

sovereign debt 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