Search Results
Journal Article
The politics of sovereign defaults
In this article, we study the interplay between political factors and default decisions. First, we survey two branches of theoretical studies. One shows that governments may be willing to repay their debt because it is in the best interest of local agents with political power. The other one discusses how political turnover affects sovereign default risk. Second, we describe a large body of empirical studies that find evidence of the influence of political stability and other characteristics of a political system on default risk. Finally, we examine the role of political factors in five recent ...
Journal Article
Life cycle patterns and boom-bust dynamics in U.S. housing prices
Home equity did not increase much for households younger than 35 years of age between 1998 and 2007 because the increase in house prices was offset by an equivalent increase in mortgage debt.
Working Paper
Asymmetric information and the lack of international portfolio diversification
There is pervasive evidence that individuals invest primarily in domestic assets and thus hold poorly diversified portfolios. Empirical studies suggest that informational asymmetries may play a role in explaining the bias towards domestic assets. In contrast, theoretical studies based on asymmetric information fail to produce significant quantitative effects. The present paper develops a theoretical model in which the presence of informational asymmetries explains a significant fraction of the home equity bias observed in the data. The main departure from previous theoretical work is the ...
Working Paper
Fiscal rules and the sovereign default premium
We find the optimal target values for fiscal rules and measure their aggregate effects using a model of sovereign default. We calibrate the model to an economy that pays a significant sovereign default premium when the government is not constrained by fiscal rules. For different levels of the default premium, we find that a government with a debt of 38 percent of trend income (typical in the case studied here) chooses to commit to a debt ceiling of 30 percent of trend income that starts being enforced four years after its announcement. This rule generates expectations of lower future ...
Briefing
Is a new asset bubble emerging in certain markets?
Some economists have argued that recent rallies in certain asset markets ? most notably, commodities and emerging market equities ? represent the emergence of a new bubble fueled by accommodative monetary policy and carry trade activity. There is evidence, though, that the rallies can be explained by strong economic fundamentals in these markets.
Working Paper
A quantitative study of the role of wealth inequality on asset prices
This paper studies the equilibrium properties of asset prices in a Lucas-tree model when agents display a concave coefficient of absolute risk tolerance. The latter introduces a role for wealth inequality, even under the presence of complete markets. The paper finds evidence suggesting that the role of wealth inequality on asset prices may be non-negligible. For the baseline calibration, the equity premium in the unequal economy is half a percentage point larger than the equity premium displayed by an egalitarian economy. The difference increases to one percentage point once we allow for the ...
Working Paper
Asset Trading and Valuation with Uncertain Exposure
This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability ...
Working Paper
Sudden stops, time inconsistency, and the duration of sovereign debt
We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: Governments would like to commit to a duration that is 1.7 years shorter ...
Journal Article
On the benefits of GDP-indexed government debt: lessons from a model of sovereign defaults
Whether governments should issue GDP-indexed sovereign debt continues to be the subject of policy debates. This article contributes to this debate by studying the effects of issuing GDP-indexed sovereign debt contracts using the equilibrium default model studied by Aguiar and Gopinath (2006) and Arellano (2008). We consider an extension with perfect indexation, i.e., the government issues Arrow-Debreu securities with payoffs that depend on the next-period aggregate income realization. The ex-ante welfare gain from the introduction of income-indexed bonds is equivalent to a permanent increase ...
Briefing
Recoveries from recessions associated with banking crises : how does this one compare?
Recessions associated with banking crises tend to differ from other recessions in that the weakness of the financial sector, particularly the limited supply of credit, encumbers the subsequent recovery. The recovery from the 2007-09 recession, compared to past recoveries from recessions associated with banking crises, is within the historical range in terms of its level of GDP growth. In terms of unemployment, however, the recovery from the 2007-09 recession is markedly weaker than the historical norm.>