Debt Hold Up and International Lending

Are lending contracts between international financial institutions (IFIs) and sovereign borrowers optimal? To address this question this paper builds on two ideas. First, the prospect of future debt relief can make it profitable for an IFI to continue lending even if lending contracts are currently violated. Second, some policy makers may prefer not implement reform contract and this preference remains unobserved to the IFI. Hence, some governments may strategically implement contracts in order to accumulate debt. When the debt stock becomes sufficiently large, it can be used as an “hold up†instrument, enabling the government to implement its preferred policy, assured that lending will continue. To mitigate the risk of “hold upâ€, the IFI may use lending contracts to screen such borrowers, leading to distorted reform contracts.Economic Reform, IMF Lending

Debt “Hold Up†and International Lending

Are lending contracts between international financial institutions (IFIs) and sovereign borrowers optimal? To address this question this paper builds on two ideas. First, the prospect of future debt relief can make it profitable for an IFI to continue lending even if lending contracts are currently violated. Second, some policy makers may prefer not implement reform contracts, and this preference remains unobserved to the IFI. Hence, some governments may strategically implement contracts in order to accumulate debt. When the debt stock becomes sufficiently large, it can be used as an “hold up†instrument, enabling the government to implement its preferred policy, assured that lending will continue. To mitigate the risk of “hold upâ€, the IFI may use lending contracts to screen such borrowers, leading to distorted reform contracts.reputation, reform, IMF lending

Constituencies and Legislation: The Fight over the McFadden Act of 1927

The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in U.S. banking history, and its influence was still felt over half a century later. The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching. Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. Unlike previous work, we find strong evidence of elite influence. We find congressmen in districts in which landholdings were concentrated (suggesting a landed elite), and where the cost of bank credit was high and its availability limited (suggesting limited banking competition and high potential rents), were significantly more likely to oppose the act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they themselves are likely to be shaped by well organized elites, even in countries with benign political institutions.

Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century

Economists have argued that a high concentration of land holdings in a country can create powerful interest groups that retard the creation of economic institutions, and thus hold back economic development. Could these arguments apply beyond underdeveloped countries with backward political institutions? We find that in the early 20th century, the distribution of land in the United States is correlated with the extent of banking development. Correcting for state effects, counties with very concentrated land holdings tend to have disproportionately fewer banks per capita in the 1920s. Banks were especially scarce both when landed elites' incentive to suppress finance, as well as their ability to exercise local influence, was higher, suggesting support for a political economy explanation. Counties with high land concentration and fewer banks also had higher interest rates and lower loan to value ratios, consistent with more restricted access to finance. Interestingly, counties with greater land concentration had fewer loan losses during the Great Depression, consistent with borrowers in those counties being less risky, even while they had more limited access to credit in the years leading up to the Depression. We draw lessons from this episode for understanding financial and economic development.

Gender Differences in Russian Colour Naming

In the present study we explored Russian colour naming in a web-based psycholinguistic experiment (http://www.colournaming.com). Colour singletons representing the Munsell Color Solid (N=600 in total) were presented on a computer monitor and named using an unconstrained colour-naming method. Respondents were Russian speakers (N=713). For gender-split equal-size samples (NF=333, NM=333) we estimated and compared (i) location of centroids of 12 Russian basic colour terms (BCTs); (ii) the number of words in colour descriptors; (iii) occurrences of BCTs most frequent non-BCTs. We found a close correspondence between females’ and males’ BCT centroids. Among individual BCTs, the highest inter-gender agreement was for seryj ‘grey’ and goluboj ‘light blue’, while the lowest was for sinij ‘dark blue’ and krasnyj ‘red’. Females revealed a significantly richer repertory of distinct colour descriptors, with great variety of monolexemic non-BCTs and “fancy” colour names; in comparison, males offered relatively more BCTs or their compounds. Along with these measures, we gauged denotata of most frequent CTs, reflected by linguistic segmentation of colour space, by employing a synthetic observer trained by gender-specific responses. This psycholinguistic representation revealed females’ more refined linguistic segmentation, compared to males, with higher linguistic density predominantly along the redgreen axis of colour space

Banking Crises and Crisis Dating: Theory and Evidence

Abstract We formulate a simple theoretical model of a banking industry which we use to identify and construct theory-based measures of systemic bank shocks (SBS). These measures differ from "banking crisis" (BC) indicators employed in many empirical studies, which are constructed using primarily information on government actions undertaken in response to bank distress. Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BC series that have appeared in the literature, indicating that BC indicators actually measure lagged policy responses to systemic bank shocks. We then re-examine the impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on the probability of a systemic bank shocks (SBS) and on "banking crisis" (BC) indicators. We find that the impact of these variables on the likelihood of a policy response to banking distress is totally different from that on the likelihood of a systemic bank shock. Disentangling the effects of systemic bank shocks and policy responses turns out to be crucial in understanding both the roots of bank fragility and the relevant policy implications. Many findings of a large empirical literature need to be reassessed and/or re-interpreted