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Author:Aguiar, Mark 

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Coordination and Crisis in Monetary Unions

We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of ...
Staff Report , Paper 511

Working Paper
Self-Fulfilling Debt Crises, Revisited

We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed ...
Working Papers , Paper 20-03

Working Paper
Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal

We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as ?desperate deals?, the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at ...
Working Papers , Paper 17-7

Discussion Paper
Lifestyle prices and production

Using scanner data and time diaries, we document how households substitute time for money through shopping and home production. We find evidence that there is substantial heterogeneity in prices paid across households for identical consumption goods in the same metro area at any given point in time. For identical goods, prices paid are highest for middle-aged, rich, and large households, consistent with the hypothesis that shopping intensity is low when the cost of time is high. The data suggest that a doubling of shopping frequency lowers the price paid for a given good by approximately 10 ...
Public Policy Discussion Paper , Paper 05-3

Working Paper
Defaultable debt, interest rates and the current account

World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina?s default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to ...
Working Paper Series , Paper 2004-31

Report
Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models

We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of ...
Staff Report , Paper 565

Report
Fiscal Policy in Debt Constrained Economies

We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and ...
Staff Report , Paper 518

Working Paper
Emerging market business cycles: the cycle is the trend

Business cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility, and dramatic ?sudden stops? in capital inflows. These features contrast with those of developed, small open economies and highlight the uniqueness of emerging markets. Nevertheless, we show that both qualitatively and quantitatively a standard dynamic stochastic, small open economy model can account for the behavior of both types of markets. Motivated by the observed frequent policy-regime switches in emerging markets, our underlying ...
Working Papers , Paper 04-4

Working Paper
Defaultable debt, interest rates, and the current account

World capital markets have experienced large-scale sovereign defaults on a number of occasions, the most recent being Argentina?s default in 2002. In this paper, we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates than in slumps. ...
Working Papers , Paper 04-5

Working Paper
Measuring trends in leisure: the allocation of time over five decades

In this paper, we use five decades of time-use surveys to document trends in the allocation of time. We document that a dramatic increase in leisure time lies behind the relatively stable number of market hours worked (per working-age adult) between 1965 and 2003. Specifically, we document that leisure for men increased by 6-8 hours per week (driven by a decline in market work hours) and for women by 4-8 hours per week (driven by a decline in home production work hours). This increase in leisure corresponds to roughly an additional 5 to 10 weeks of vacation per year, assuming a 40-hour work ...
Working Papers , Paper 06-2

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