Creator: Kehoe, Patrick J. and Perri, Fabrizio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 621 Abstract:
Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed in many contexts, in particular between sovereign countries. In this paper we show that these constrained efficient allocations arise as equilibria in an economy in which private agents behave competitively, taking as given a set of taxes. We then show that these taxes, which end up limiting risk sharing, arise as an equilibrium of a dynamic game between governments. Our decentralization is different from the existing ones proposed in the literature. We find it intuitively appealing and we think it goes farther than the existing literature in endogenizing the primitive forces that lead to a lack of risk sharing in equilibrium.
Stichwort: Risk-sharing, Sustainable equilibrium, Decentralization, Sovereign debt, Enforcement constraints, Default, and Incomplete markets Fach: F30 - International Finance: General, F34 - International Lending and Debt Problems, E21 - Macroeconomics: Consumption; Saving; Wealth, E32 - Business Fluctuations; Cycles, E44 - Financial Markets and the Macroeconomy, and D50 - General Equilibrium and Disequilibrium: General
Creator: Kehoe, Patrick J. and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 307 Abstract:
We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital, these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.
Stichwort: Sovereign debt, Decentralization, Enforcement constraints, Sustainable equilibrium, Incomplete markets, Risk-sharing, and Default Fach: F30 - International Finance: General, E44 - Financial Markets and the Macroeconomy, E21 - Macroeconomics: Consumption; Saving; Wealth, F34 - International Lending and Debt Problems, D50 - General Equilibrium and Disequilibrium: General, and E32 - Business Fluctuations; Cycles