Do We Need a New Bankruptcy Regime?

macroeconomics, sovereign debt, new bankruptcy arrangements, New Bankruptcy Regime

Political and Economic Determinants of Budget Deficits in the IndustrialDemocracies

This paper focuses on the management of fiscal deficits and the public debt in the industrial democracies. Given the large deficits in many OECD countries in recent years, and the resulting sharp rise in the public debt, it is important to determine the economic and political forces leading to such large deficits. We find only partial support for the "equilibrium approach to fiscal policy", which assumes that tax rates are set over time in order to minimize the excess burden of taxation. Tax rates do not seem to be smoothed, and budget deficits in many countries in recent years appear to be too large to be explained by appeal to transitory increases in government spending. We suggest that in several countries the slow rate at which the post-'73 fiscal deficits were reduced resulted from the difficulties of political management in coalition governments. There is a clear tendency for larger deficits in countries characterized by a by a short average tenure of government and by the presence of many political parties in a ruling coalition.

Financial Intermediation and Monetary Policies in the World Economy

In this paper we investigate the role of credit institutions in transmitting monetary shocks to the domestic economy and to the rest of the world output. In modeling the monetary and financial sector of the economy we distinguish between monetary injections via lump-sum transfers to individuals and those via increased credit to the commercial banking sector in the form of discount window operations. Appropriately, we distinguish between the discount rate of the central bank and the lending and borrowing interest rates of commercial banks, which, we assume, are also subject to reserves requirements. We find that a steady state increase in monetary injections via increases in domestic credit leads to an increase in domestic output. On the other hand, we find that an increase in the steady state level of monetary transfers reduces the level of output.

'Rules of Thumb' for Sovereign Debt Crises

Sovereign Default, Debt Crises

Sources of Macroeconomic Imbalances in the World Economy: A Simulation Approach

This paper uses a global macroeconomic simulation model to identify the factors that have contributed to global trade and financial imbalances in the 1980s. After investigating the properties of monetary and fiscal policies in the model, we examine whether the budgetary shifts in the OECD economies in the 1980s can account for the bulk of trade and exchange rate movements. Our conclusions are mixed. The combination of sharply higher fiscal deficits in the United States and sharply reduced deficits in Japan goes far to explain the movements of the trade balances and exchange rates of the two economies. However, the drop in the dollar vis-a-vis the Yen since late 1985 is not well explained by the model. We also investigate the prospects for a reduction of the U.S. trade deficits if U.S. budget deficits are in fact reduced, as well as the possible role for Japanese monetary and fiscal policies in reducing the trade imbalances of the two countries.

Liquidity Models in Open Economies: Theory and Empirical Evidence

This paper presents an overview of recent theoretical and empirical research on 'liquidity models' in open economies; this is a class of optimizing models where money has effects on real asset prices and economic activity without relying on the 'ad-hoc' assumption of price/wage stickiness. The non-neutrality of money derives from a temporary segmentation between goods and asset markets. After surveying the theoretical literature on liquidity models, we present empirical evidence based on VAR econometric techniques for the seven major industrial countries. Such evidence is shown to be consistent with the main implications of the liquidity models.

Current Account and Budget Deficits in an Intertemporal Model of Consumption and Taxation Smoothing. A Solution to the "Feldstein-Horioka Puzzle"?

This paper presents an infinite horizon model of consumption and taxation " smoothing" that implies a simple relation between current accounts, budget deficits, investment rates and transitory output shocks. It is argued that such a model could explain the "Feldstein-Horioka puzzle" of the apparent lack of international capital mobility. Traditional regressions of the savings rate on the investment rate, as performed in the literature, are shown to be incorrect tests of the hypothesis of capital mobility because they do not control for the independent role of budget deficits and temporary output shocks in the current account and savings equations. Empirical tests of the model for a sample of 18 OECD countries present good evidence that international capital markets are widely integrated and that the "Feldstein-Horioka puzzle" might be explained by the important role of fiscal deficits in the determination of the current account and the saving behavior.