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Working Paper
Avoiding Sovereign Default Contagion: A Normative Analysis
Mallucci, Enrico; De Ferra, Sergio (2020-02-27)
Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be ...
International Finance Discussion Papers , Paper 1275

Working Paper
Cross-Border Bank Flows and Monetary Policy
Paligorova, Teodora; Zlate, Andrei; Correa, Ricardo; Sapriza, Horacio (2018-12-03)
We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks ...
International Finance Discussion Papers , Paper 1241

Report
No guarantees, no trade: how banks affect export patterns
Schmidt-Eisenlohr, Tim; Niepmann, Friederike (2013-12-01)
This study provides evidence that shocks to the supply of trade finance have a causal effect on U.S. exports. The identification strategy exploits variation in the importance of banks as providers of letters of credit across countries. The larger a U.S. bank?s share of the trade finance market in a country, the larger should be the effect on exports to that country if the bank changes its supply of letters of credit. We find that a shock of one standard deviation to a country?s supply of letters of credit increases export growth, on average, by 1.5 percentage points. The effect is larger for ...
Staff Reports , Paper 659

Working Paper
Argentina’s “Missing Capital” Puzzle and Limited Commitment Constraints
Kydland, Finn E.; Zarazaga, Carlos E.; Kapicka, Marek (2018-12-01)
Capital accumulation in Argentina was slow in the 1990s, despite high total factor productivity (TFP) growth and low international interest rates. A possible explanation for the ?missing capital? is that foreign investors were reluctant to take advantage of the high returns to investment seemingly offered by that small open economy under such favorable conditions, on the grounds that previous historical developments had led them to perceive Argentina as a country prone to external debt ?opportunistic defaults.? The paper examines this conjecture from the perspective of an optimal contract ...
Working Papers , Paper 1815

Working Paper
Interest Rate Volatility and Sudden Stops : An Empirical Investigation
Tenorio, Gabriel; Reyes-Heroles, Ricardo M. (2017-07)
Using a multi-country regime-switching vector autoregressive (VAR) model we document the existence of two regimes in the volatility of interest rates at which emerging economies borrow from international financial markets, and study the statistical relationship of such regimes with episodes of sudden stops. Periods of high volatility tend to be persistent and are associated with high interest rates, the occurrence of sudden stops in external financing, and large declines in economic activity. Most strikingly, we show that regime switches drive the countercyclicality of interest rates in ...
International Finance Discussion Papers , Paper 1209

Working Paper
Optimal Domestic (and External) Sovereign Default
D'Erasmo, Pablo; Mendoza, Enrique G. (2017-02-10)
Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a ?forgotten history? in macroeconomics. We propose a heterogeneous- agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to value of debt for self-insurance, liquidity, and risk-sharing. The government?s aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government ...
Working Papers , Paper 17-4

Working Paper
Banking Regulation with Risk of Sovereign Default
Schoors, Koen; Livshits, Igor; D'Erasmo, Pablo (2019-02-22)
Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as ?safe,? even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to ?gamble? with depositors? funds by purchasing risky government bonds (and assets ...
Working Papers , Paper 19-15

Working Paper
Monetary Independence and Rollover Crises
Bianchi, Javier; Mondragon, Jorge (2018-12-03)
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 ...
Working Papers , Paper 755

Working Paper
The Stock of External Sovereign Debt: Can We Take the Data at ‘Face Value’?
Dias, Daniel A.; Wright, Mark L. J.; Richmond, Christine (2014-05-09)
The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum of future principal repayments, face values are misleading when debts are issued with different contractual forms or maturities. In this paper, we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity. We show that our alternative measures: (1) paint a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external ...
Working Paper Series , Paper WP-2014-5

Working Paper
International Trade Risk and the Role of Banks
Schmidt-Eisenlohr, Tim; Niepmann, Friederike (2015-11-16)
International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. This paper explores under which conditions and to what extent firms use these products. We find that letters of credit and documentary collections cover about 10 percent of U.S. exports and are preferred for larger transactions, indicating substantial fixed costs. Letters of credit are employed the most for exports to countries with intermediate contract enforcement. Compared to documentary collections, they are used for riskier ...
International Finance Discussion Papers , Paper 1151

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