Essays on Sovereign Debt: Default, Fiscal Rules, and Bailouts - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Essays on Sovereign Debt: Default, Fiscal Rules, and Bailouts write by Francisco Luis Roch. This book was released on 2012. Essays on Sovereign Debt: Default, Fiscal Rules, and Bailouts available in PDF, EPUB and Kindle. Chapter 3, which is a joint work with Harald Uhlig, provides a theoretical framework to analyze the dynamics of the sovereign debt crisis of a member country in a monetary union and the role of various bailout mechanisms. We analyze the unfolding and the debt dynamics, if debt pricing is left to markets alone. Next, we discuss the dynamics, if there is intervention by some bail-out mechanism. We characterize the minimal actuarily fair intervention that restores the "good" equilibrium of Cole-Kehoe, relying on the market to provide residual financing.
Essays on Sovereign Debt in Federations
Essays on Sovereign Debt in Federations - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Essays on Sovereign Debt in Federations write by Angela Nolte. This book was released on 2012. Essays on Sovereign Debt in Federations available in PDF, EPUB and Kindle. The thesis analyses the moral hazard problem which arises in political or fiscal federations when member states anticipate being bailed out by the centre in case of financial distress. In particular, I examine whether an orderly default mechanism or deeper fiscal integration within the European Union can alleviate the soft budget constraint phenomenon and provide a solution to the sovereign debt crises engulfing the Eurozone and other parts of the world. The first essay adapts the standard Stackelberg approach of the bailout literature in order to study the effects of bankruptcy procedures on regional opportunistic behaviour. The insolvency mechanism is shaped by two parameters: the costs of default and the exemption level for public assets. The model lends support to the market discipline hypothesis if all public assets are exempt from seizure. If, by contrast, the exemption level for public assets is low, it is the central government rather than the credit market that discourages overborrowing since the former is incentivised to tax heavily indebted regions. The model's major policy insight is that an insolvency mechanism can lower the federation's welfare if it is not carefully designed. The second essay sheds light on the incentive effects of the sovereign debt restructuring mechanism which has been drafted by the Eurozone in response to the debt crisis. Employing a global game approach, the model analyses the impact of insolvency procedures on the size of the bailout, the level of effort exerted by the debtor country and EU welfare. Challenging some arguments in the policy literature, the model's major policy implication is that a half-hearted debt restructuring mechanism fails to mitigate the commitment and moral hazard problems embedded in the current EMU framework. The third essay questions the conventional wisdom that the Euro cannot survive without closer integration, using a simple political economy framework. The model compares the stability and welfare implications of the current "muddling through" scenario, an orderly default mechanism as well as a fiscal and a political union setting. Interestingly, the results suggest that the "muddling through" scenario is not more prone to break-up than the political or the fiscal union. The model's major policy recommendation is that implementing an orderly default mechanism and inserting an explicit exit clause into the European Treaties might prove more effective in preventing a Eurozone break-up than far-reaching institutional reforms.
The Dynamics of Sovereign Debt Crises and Bailouts
The Dynamics of Sovereign Debt Crises and Bailouts - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook The Dynamics of Sovereign Debt Crises and Bailouts write by Mr.Francisco Roch. This book was released on 2016-09-06. The Dynamics of Sovereign Debt Crises and Bailouts available in PDF, EPUB and Kindle. Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.
Essays on Sovereign Debt and Monetary Economics
Essays on Sovereign Debt and Monetary Economics - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Essays on Sovereign Debt and Monetary Economics write by Diego J. Perez. This book was released on 2015. Essays on Sovereign Debt and Monetary Economics available in PDF, EPUB and Kindle. This dissertation contains three essays on Sovereign Debt and Monetary Economics. The first chapter, entitled 'Sovereign Debt, Domestic Banks and the Provision of Public Liquidity' studies the effect of a sovereign default in the domestic economy and its implications for the government's incentives to repay its debt. I explore two mechanisms through which a sovereign default can disrupt the domestic economy via its banking system. First, a sovereign default creates a negative balance-sheet effect on banks, which reduces their ability to raise funds and prevents the flow of resources to productive investments. Second, default undermines internal liquidity as banks replace government securities with less productive investments. I quantify the model using Argentinean data and find that these two mechanisms can generate a deep and persistent fall in output post-default, which accounts for the government's commitment necessary to explain observed levels of external public debt. The balance-sheet effect is more important because it generates a larger output cost of default and a stronger ex-ante commitment for the government. Post-default bailouts of the banking system, although desirable ex-post, are welfare reducing ex-ante since they weaken government's commitment. Imposing a minimum public debt requirement on banks is welfare improving as it enhances commitment by increasing the output cost of default. The second chapter, entitled 'Sovereign Debt Maturity Structure Under Asymmetric Information' 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 the size of this wedge differs with the maturity of debt. Long-term debt becomes less attractive for safe borrowers since it pools more default risk that is not inherent to them. In response, safe borrowers issue low levels of debt with a shorter maturity profile -relative to the optimal choice under perfect information- and risky borrowers mimic the behavior of safe borrowers to preclude the market from identifying their type. In times of financial distress, the default risk wedge of long-term debt relative to short-term debt increases which makes borrowers reduce the amount of debt issuance and shorten its maturity profile. I present empirical evidence on sovereign debt maturity choices and sovereign spreads for a panel of emerging economies that is consistent with the model's implications. The third chapter, entitled 'Price Setting Under Uncertainty About Inflation', is based on a working paper coauthored with Andres Drenik. This chapter provides an empirical assessment of the effects of the availability of public information about inflation on price setting. We exploit an event in which economic agents lost access to information about the inflation rate: starting in 2007 the Argentinean government began to misreport the national inflation rate. Our difference-in-difference analysis reveals that this policy led to an increase in the coefficient of variation of prices of 18% with respect to its mean. This effect is analyzed in the context of a general equilibrium model in which agents make use of publicly available information about the inflation rate to set prices. We quantify the model and use it to further explore the effects of higher uncertainty about inflation on the effectiveness of monetary policy and aggregate welfare. We find that monetary policy becomes more effective in a context of higher uncertainty about inflation and that not reporting accurate measures of the CPI entails significant welfare losses.
Essays on Sovereign Default
Essays on Sovereign Default - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Essays on Sovereign Default write by Tiago Gomes da Silva Tavares. This book was released on 2015. Essays on Sovereign Default available in PDF, EPUB and Kindle. "This dissertation contributes to literature of International Economics and, in particular, of Sovereign Default with the study of three distinct issues. In the first chapter, I study the role of international reserves in sovereign debt restructuring episodes when fiscal adjustment is costly. This study departs from the observation that highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This chapter shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero. In the second chapter, the relationship between labor market distortions and sovereign debt crises is explored. It is noted that risk of sovereign debt default has frequently affected both emerging market and developed economies. Such financial crises are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model. In this chapter, 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 countercyclical 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. Finally, in the third chapter, I develop a debt-to-output decomposition and document that a large fraction of the increase in the debt to output ratio during default is accounted by variations in the exchange rate. Also, using a large dataset on historical sovereign debt crises, it is shown in this chapter that devaluations of the exchange rate during periods of default are positively associated with international investor losses (haircuts) when debt is restructured. These results can be rationalized with the fact that large real devaluation decrease output when measured in foreign goods, thus reducing the availability of resources that can be used during negotiations. This implies that exchange rate fluctuations are an important source of risk in emerging economies affecting, among other things, debt dynamics and restructuring outcomes. As such, I conclude that most of the exchange rate neglect, typical in the sovereign default literature, should be seriously reconsidered"--Pages iii-v.
