Creator: Arellano, Cristina and Bai, Yan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 495 Abstract:
This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises.
Keyword: Sovereign default, Contagion, and Renegotiation policy Subject (JEL): F30 - International Finance: General and G01 - Financial Crises
Creator: Arellano, Cristina and Bai, Yan Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 491 Abstract:
We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders. Countries default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. Defaulting is also attractive in response to foreign defaults because the cost of rolling over the debt is higher when other countries default. Such forces are quantitatively important for generating a positive correlation of spreads and joint incidence of default. The model can rationalize some of the recent economic events in Europe as well as the historical patterns of defaults, renegotiations, and recoveries across countries.
Keyword: Sovereign default, Renegotiation, Self-fulfilling crisis, Contagion, and European debt crisis Subject (JEL): F30 - International Finance: General and G01 - Financial Crises
Creator: Holmes, Thomas J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 368 Abstract:
Unionism in the United States is contagious; it spills out of coal mines and steel mills into other establishments in the neighborhood, like hospitals and supermarkets. The geographic spillover of unionism is documented here using a newly constructed establishment level data on unionism that is rich in geographic detail. A strong connection is found between unionism of health care establishments today and proximity to unionized coal mines and steel mills from the 1950s.
Keyword: Spillover, Contagion, Unions, and South Subject (JEL): J50 - Labor-Management Relations, Trade Unions, and Collective Bargaining: General and R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics: General