Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 497 Abstract:
In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end.
Keyword: Collateral, Penalty interest rate, Bailout, and Sovereign debt Subject (JEL): F34 - International Lending and Debt Problems, G01 - Financial Crises, and F53 - International Agreements and Observance; International Organizations
Creator: Kehoe, Timothy Jerome, 1953-, Ruhl, Kim J., and Steinberg, Joseph B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 489 Abstract:
Since the early 1990s, as the United States borrowed heavily from the rest of the world, employment in the U.S. goods-producing sector has fallen. We construct a dynamic general equilibrium model with several mechanisms that could generate declining goods-sector employment: foreign borrowing, nonhomothetic preferences, and differential productivity growth across sectors. We find that only 15.1 percent of the decline in goods-sector employment from 1992 to 2012 stems from U.S. trade deficits; most of the decline is due to differential productivity growth. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall.
Keyword: Global imbalances, Structural change, and Real exchange rate Subject (JEL): O41 - One, Two, and Multisector Growth Models, F34 - International Lending and Debt Problems, and E13 - General Aggregative Models: Neoclassical
Creator: Conesa, Juan Carlos and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 465 Abstract:
We develop a model for analyzing the sovereign debt crises of 2010–2013 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government also has an incentive to smooth consumption and increase debt. Our exercise identifies conditions on fundamentals for which the incentive to smooth consumption dominates, giving rise to a situation where governments optimally “gamble for redemption,” running fiscal deficits and increasing their debt, thereby increasing their vulnerability to crises.
Keyword: Recession, Debt crisis, Eurozone, and Rollover crisis Subject (JEL): F44 - International Business Cycles, F34 - International Lending and Debt Problems, H13 - Economics of Eminent Domain; Expropriation; Nationalization, and E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 414 Abstract:
A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994–95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
Keyword: Developing country crisis, Real exchange rate, Sudden stop, Total factor productivity, Nontradable, Mexico, and Tradable Subject (JEL): F43 - Economic Growth of Open Economies, F34 - International Lending and Debt Problems, O41 - One, Two, and Multisector Growth Models, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, F32 - Current Account Adjustment; Short-term Capital Movements, F21 - International Investment; Long-term Capital Movements, E21 - Macroeconomics: Consumption; Saving; Wealth, and O54 - Economywide Country Studies: Latin America; Caribbean
Creator: Cole, Harold Linh, 1957- and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 210 Abstract:
This paper explores the extent to which the Mexican government's inability to roll over its debt during December 1994 and January 1995 can be modeled as a self-fulfilling debt crisis. In the model there is a crucial interval of debt for which the government, although it finds it optimal to repay old debt if it can sell new debt, finds it optimal to default if it cannot sell new debt. If government debt is in this interval, which we call the crisis zone, then we can construct equilibria in which a crisis can occur stochastically, depending on the realization of a sunspot variable. The size of this zone depends on the average length of maturity of government debt. Our analysis suggests that for a country, like Mexico, with a very short maturity structure of debt, the crisis zone is large and includes levels of debt as low as that in Mexico before the crisis.
Keyword: Sunspot, Debt crisis, and Mexico Subject (JEL): E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General, H63 - National Debt; Debt Management; Sovereign Debt, and F34 - International Lending and Debt Problems