On the irrelevance of the maturity structure of government debt without commitment

This paper presents a government debt game with the property that if the timing of debt auctions within a period is sufficiently unfettered, the set of equilibrium outcome paths of real economic variables given the government has access to a rich debt structure is identical to the set of equilibrium outcome paths given the government can issue only one-period debt.Debt

Optimal Monetary Policy in a Liquidity Trap

We consider the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. We show, in the context of an intertemporal equilibrium model, that open-market operations, even of unconventional' types, are ineffective if they do not change expectations about the future conduct of policy; in this sense, a liquidity trap' is possible. Nonetheless, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In our model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. We also discuss ways in which other central-bank actions, while irrelevant apart from their effects on expectations, may help to make credible a central bank's commitment to its target, and consider implications for the policy options currently available for overcoming deflation in Japan.

The Zero Bound on Interest Rates and Optimal Monetary Policy

This paper considers the consequences for monetary policy of the zero floor for nominal interest rates. The zero bound can be a significant constraint on the ability of a central bank to combat deflation. The paper shows, in the context of an intertemporal equilibrium model, that open-market operations, even of "unconventional" types, are ineffective if future policy is expected to be purely forward looking. However, a credible commitment to the right sort of history-dependent policy can largely mitigate the distortions created by the zero bound. In the model, optimal policy involves a commitment to adjust interest rates so as to achieve a time-varying price-level target, when this is consistent with the zero bound. The paper also discusses ways in which other central bank actions, although irrelevant apart from their effects on expectations, may help to make a central bank's commitment to its target more credible.macroeconomics, Zero Bound, Interest Rates, Optimal Monetary Policy

Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses

This paper surveys the empirical analyses that examine the effects of the Bank of Japan's (BOJ's) quantitative easing policy (QEP), which was implemented from March 2001 through March 2006. The survey confirms a clear effect whereby the commitment to maintain the QEP fostered the expectations that the zero interest rate would continue into the future, thereby lowering the yield curve centering on the short- to medium-term range. There were also phases in which an increase in the current account balances held by financial institutions at the BOJ bolstered this expectation. While the results were mixed as to whether expansion of the monetary base and altering the composition of the BOJ's balance sheet led to portfolio rebalancing, generally this effect, if any, was smaller than that stemming from the commitment. When viewing the QEP's impact on Japan's economy through various transmission channels, many of the analyses suggest that the QEP created an accommodative environment in terms of corporate financing. In particular, the QEP contained financial institutions' funding costs from the market and staved off financial institutions' funding uncertainties. The QEP's effect on raising aggregate demand and prices was often limited, due largely to the then progressing corporate balance-sheet adjustment, as well as the zero bound constraint on interest rates.Zero interest rate policy; Quantitative easing policy; Commitment; Zero bound constraint on interest rates; Deflation

Sovereign Debt and the “Contracts Matter” Hypothesis

The academic literature on sovereign debt largely assumes that law has little role to play. Indeed, the primary question addressed by the literature is why sovereigns repay at all given the irrelevance of legal enforcement. But if law, and specifically contract law, does not matter, how to explain the fact that sovereign loans involve detailed contracts, expensive lawyers, and frequent litigation? This Essay makes the case that contract design matters even in a world where sovereign borrowers are hard (but not impossible) to sue. We identify a number of gaps in the research that warrant further investigation

Debt Maturity without Commitment

I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long- term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence.

Heterodox Central Banking

This paper discusses theoretical and practical aspects of the various unconventional central bank policies during the 2008-2009 crisis. In terms of theory, we first discuss the role of credibility in the attainment of inflationary goals once the nominal interest rate is at a lower bound, paying particular attention to the role of the central bank’s balance sheet. Additionally, we present a model which has at its core a financial imperfection that highlights the role of bank’s capital as well as the relevance of alternative credit policies that can be used to deal with financial distress. On the other hand, we review evidence regarding the recent experience. We discuss the timing and type of observed unconventional policies. We then explore alternative measures to assess the stance of monetary policy in a situation when the policy rate has reached its lower bound. Finally, we present some descriptive evidence on the effect of the applied policies on the shape of the yield curve and the lending-deposit spread.

Sovereign Debt: Indexation and Maturity

In this paper we review the literature on sovereign debt with particular emphasis on indexation and maturity and the main policy proposals related to these topics. We also advance some implications derived from our work. In Alfaro and Kanczuk (2005a, b, c), we modeled sovereign debt as a contingent claim following the framework developed by Grossman and Van Huyck (1988). Our framework, however, recognizes that contingent debt might be associated with incentive problems. Applying this framework to the study of the sustainability of sovereign debt, the tradeoff between nominal and indexed debt, and the optimal debt maturity, we find some of the proposals advanced in the literature regarding lengthening debt maturity and issuing nominal debt to be unsustainable in emerging (volatile) economies.

Debt Maturity without Commitment

I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long-term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence.debt, maturity structure, no commitment, default