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Working Paper
Debt constrained asset markets
Kehoe, Timothy J.; Levine, David K. (1992)
We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter ...
Working Papers , Paper 445

Working Paper
Optimality and monetary equilibria in stationary overlapping generations models with long lived agents: growth versus discounting
Aiyagari, S. Rao (1986)
This paper studies the relationship between the existence and optimality of a monetary steady-state and the nonoptimality of nonmonetary steady-states. We construct a sequence of stationary overlapping generations economies with longer and longer lived generations in which all agents maximize a discounted sum of utilities with a common discount rate. Under some assumptions the following result is established: If the discount rate is greater (less) than the population growth rate, then eventually every nonmonetary steady-state is optimal (non-optimal) and a monetary steady-state does not exist ...
Working Papers , Paper 312

Working Paper
The debasement puzzle: an essay on medieval monetary policy
Weber, Warren E.; Rolnick, Arthur J.; Velde, Francois R. (1995)
This paper establishes the stylized fact that medieval debasements were accompanied by unusually large minting volumes and revenues. This fact is a puzzle under the commonly held view that metallic coins are commodity money and exchange by weight. An existing explanation is that debased coins were used to reduce the real burden of nominally denominated debts. This explanation is logically flawed: nothing prevents agents from renegotiating contracts and avoid incurring minting costs. The paper also establishes other facts about monetary mutations, which altogether pose a challenge to monetary ...
Working Papers , Paper 536

Working Paper
Economies of density versus natural advantage: crop choice on the back forty
Lee, Sanghoon; Holmes, Thomas J. (2009)
We estimate the factors determining specialization of crop choice at the level of individual fields, distinguishing between the role of natural advantage (soil characteristics) and economies of density (scale economies achieved when farmers plant neighboring fields with the same crop). Using rich geographic data from North Dakota, including new data on crop choice collected by satellite, we estimate the analog of a social interactions econometric model for the planting decisions on neighboring fields. We find that planting decisions on a field are heavily dependent on the soil characteristics ...
Working Papers , Paper 668

Working Paper
Fiscal Stimulus under Sovereign Risk
Presno, Ignacio; Ottonello, Pablo; Bianchi, Javier (2019-09-12)
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 ...
Working Papers , Paper 762

Working Paper
International Reserves and Rollover Risk
Bianchi, Javier; Martinez, Leonardo; Hatchondo, Juan Carlos (2016-11-03)
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 ...
Working Papers , Paper 735

Working Paper
Inflation, financial markets, and capital formation
Boyd, John H.; Smith, Bruce D.; Choi, Sangmok (1995)
Working Papers , Paper 556

Working Paper
The Pass-Through of Sovereign Risk
Bocola, Luigi (2015-04-16)
This paper examines the macroeconomic implications of sovereign credit risk in a business cycle model where banks are exposed to domestic government debt. The news of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their available resources to finance firms (liquidity channel). Second, it generates a precautionary motive for banks to deleverage (risk channel). I estimate the model using Italian data, finding that i) sovereign credit risk was recessionary and that ii) the risk channel was sizable. I then use the model ...
Working Papers , Paper 722

Working Paper
A continuous time, general equilibrium, inventory-sales model
Christiano, Lawrence J.; Eichenbaum, Martin S. (1986)
Working Papers , Paper 304

Working Paper
The limits of counter-cyclical monetary policy: an analysis based on optimal control theory and vector autoregressions
Litterman, Robert B. (1986)
Optimal control theory can be combined with the probability structure of a vector autoregression to investigate the tradeoffs available to policymakers. Such an approach obtains results based on a minimal set of assumptions about the economy and the structure of policy actions. This paper takes this approach to analyze the potential effectiveness of countercyclical monetary policy.
Working Papers , Paper 297

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