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Creator: Atkeson, Andrew Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 381 Abstract:
This paper examines the optimal debt contract between lenders and a sovereign borrower when the borrower is free to repudiate the debt and when his decision to invest or consume borrowed funds is unobservable. We show that recurrent debt crises are a necessary part of the incentive structure which supports the optimal pattern of lending.
Mot-clé: Risk, Optimal debt contract, International capital, Foreign lending, Credit market, International loans, International debt, Debt crisis, and Moral hazard Assujettir: F34 - International Lending and Debt Problems
Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Mot-clé: Loans and Debt Assujettir: F34 - International Lending and Debt Problems and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 522 Abstract:
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.
Mot-clé: CSV, Open economy, International lending, Costly state verification, Capital investment, Closed economy, Credit rationing, International capital markets, and Credit Assujettir: F34 - International Lending and Debt Problems and O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Creator: Bianchi, Javier and Mondragon, Jorge Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 755 Abstract:
This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
Mot-clé: Monetary unions, Sovereign debt crises, and Rollover risk Assujettir: F34 - International Lending and Debt Problems, G15 - International Financial Markets, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E40 - Money and Interest Rates: General
Creator: Benjamin, David and Wright, Mark L. J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 753 Abstract:
Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay often occurs; this delay can sometimes be socially efficient. Second, prohibiting debt issuance as part of a settlement makes delay less likely to occur in equilibrium. Third, when debt issuance is not fully state contingent, delay can arise because of the risk that the sovereign will default on any debt issued as part of the settlement.
Mot-clé: Sovereign debt, Delay, Sovereign default, and Bargaining Assujettir: F34 - International Lending and Debt Problems, H63 - National Debt; Debt Management; Sovereign Debt, and C78 - Bargaining Theory; Matching Theory
Creator: Bianchi, Javier, Hatchondo, Juan Carlos, and Martinez, Leonardo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 735 Abstract:
We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, larger contingent liabilities, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.
Mot-clé: Safe assets, Rollover risk, International reserves, and Sovereign default Assujettir: F34 - International Lending and Debt Problems, F32 - Current Account Adjustment; Short-term Capital Movements, and F41 - Open Economy Macroeconomics
Creator: Bassetto, Marco Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 624 Abstract:
How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.
Mot-clé: Commitment, Implementation, Competitive equilibrium, and Government strategy Assujettir: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, F34 - International Lending and Debt Problems, and C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
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.
Mot-clé: Risk-sharing, Sustainable equilibrium, Decentralization, Sovereign debt, Enforcement constraints, Default, and Incomplete markets Assujettir: 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: Bianchi, Javier, Ottonello, Pablo, and Presno, Ignacio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 762 Abstract:
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to default, but a well-designed "fiscal forward guidance" can help reduce the excess procyclicality.
Mot-clé: Procyclicality, Fiscal stabilization policy, and Sovereign default Assujettir: F44 - International Business Cycles, H50 - National Government Expenditures and Related Policies: General, E62 - Fiscal Policy, F41 - Open Economy Macroeconomics, and F34 - International Lending and Debt Problems