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Keywords:Sovereign debt 

Report
A Neoclassical Model of the World Financial Cycle

Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the ...
Staff Report , Paper 666

Working Paper
Deconstructing Delays in Sovereign Debt Restructuring

Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay ...
Working Papers , Paper 753

Working Paper
Domestic Policies and Sovereign Default

A model with two essential elements, sovereign default and distortionary fiscal and monetary policies, explains the interaction between sovereign debt, default risk and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal tradeoffs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits, and increase inflation and currency depreciation rates, matching the patterns observed in the data for ...
Working Papers , Paper 2020-017

Briefing
Policies for Improving Sovereign Debt Restructurings

Recent sovereign default restructurings during the COVID-19 pandemic have reignited interest in research and policy suggestions for improving these restructuring episodes. Evidence for the effectiveness of these policies has largely come from empirical analysis of past episodes, but this type of analysis makes it difficult to explicitly evaluate the economic improvements from implementing these polices. We develop and calibrate a model that allows us to analyze the effects of the proposed policies.
Richmond Fed Economic Brief , Volume 23 , Issue 04

Working Paper
The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Puerto Rico's unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth ...
Working Paper , Paper 18-3

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

Working Paper
International Reserve Management under Rollover Crises

This paper investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask, should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we uncover that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads.
Working Papers , Paper 805

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

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