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Working Paper
Greed as a Source of Polarization
The political process in the United States appears to be highly polarized: evidence from voting patterns finds that the political positions of legislators have diverged substantially, while the largest campaign contributions come from the most extreme lobby groups and are directed to the most extreme candidates. Is the rise in campaign contributions the cause of the growing polarity of political views? In this paper, we show that, in standard models of lobbying and electoral competition, a free-rider problem amongst potential contributors leads naturally to a divergence in campaign ...
Are Developing Countries Facing a Possible Debt Crisis?
An analysis looks at whether developing countries are facing pressures similar to those in the 1980s, when higher interest rates helped trigger a wave of defaults in sovereign debt.
Working Paper
Empirical research on sovereign debt and default
The long history of sovereign debt and the associated enforcement problem have attracted researchers in many fields. In this paper, we survey empirical work by economists, historians, and political scientists. As we review the empirical literature, we emphasize parallel developments in the theory of sovereign debt. One major theme emerges. Although recent research has sought to balance theoretical and empirical considerations, there remains a gap between theories of sovereign debt and the data used to test them. We recommend a number of steps that researchers can take to improve the ...
Discussion Paper
Debt Statistics a la Carte : Alternative Recipes for Measuring Government Indebtedness
In this note, we apply our same measurement techniques to the debts of Greece, Ireland and Portugal and show that plausible alternative measures of indebtedness suggest that Greece is anywhere from as much as 50% more indebted, to as little as half as indebted as either Portugal or Ireland. We argue that most reasonable measures imply that Greece is far less indebted than is commonly reported, and that indebtedness levels across these three economies are roughly similar.
Working Paper
Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America
Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an ...
Report
External and Public Debt Crises
The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in ...
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 Paper
Private capital flows, capital controls, and default risk
What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents, private lending is inefficient and capital controls are potentially Pareto-improving. However, when private agents may individually default, capital flow subsidies are potentially Pareto-improving.
Working Paper
Insurance in Human Capital Models with Limited Enforcement
This paper develops a tractable human capital model with limited enforceability of contracts. The model economy is populated by a large number of long-lived, risk-averse households with homothetic preferences who can invest in risk-free physical capital and risky human capital. Households have access to a complete set of credit and insurance contracts, but their ability to use the available financial instruments is limited by the possibility of default (limited contract enforcement). We provide a convenient equilibrium characterization that facilitates the computation of recursive equilibria ...
Working Paper
Human Capital Risk, Contract Enforcement, and the Macroeconomy
We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured ...