Foreign Debt and Fear of Floating: A Theoretical Exploration

This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a flexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks.inflation, output, public debt and exchange rate regimes

Foreign Debt and Fear of Floating: A Theoretical Exploration

This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a fexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks.inflation, output, public debt and exchange rate regimes.

Political instability, public investment and macroeconomic performance

This paper attempts to provide a framework to explain both the lower share of current spending in large fiscal adjustments and the potential expansionary effects of fiscal contractions. We distinguish between current spending and productivity enhancing public investments and analyze the potential determinants of the policy maker's choice for the composition of overall public spending. Using this framework, we also link the overall macroeconomic performance to the public spending decisions. Our results suggest that raising current spending at the expense of public investment is associated with less favourable performance in terms of not only inflation and output but also, interestingly, future ‘current'' spending.composition of public spending

Monetary Union, Entry Conditions and Economic Reform.

This paper models the behaviour of a potential entrant into a monetary union where there is an inflation entry condition. In addition to making a monetary policy decision during a qualifying period, the potential entrant must make a decision about structural reform. The paper shows that the entry condition can have two undesirable effects. First, it can lead to multiple equilibria because inflationary expectations acquire a self-fulfilling property. Second, the entry condition can lead to a reduction in the amount of reform. This is because the entry condition reduces inflationary expectations and thus reduces the incentive to reform.

The Banking Sector, Government Bonds and Financial Intermediation: The Case of Emerging Market Countries

This paper develops an analytical framework to explore how financial sector characteristics shape domestic debt dynamics in emerging market economies. Our analysis suggests that the more competitive the banking sector and the more liquid and deeper the deposit market, the better would be the conditions in the public securities market. Our results also reveal that the lower the financial depth, the greater the scale of private sector credits that are crowded-out by public borrowing. To the extent that credit availability is associated with improved productivity and better output performance, the lack of financial depth in emerging market countries implies that extensive domestic borrowing in these countries may have consequences far beyond the concern with fiscal sustainability. As such, our results higlight the importance of developing domestic debt markets for financial and macroeconomic stability.Financial sector; public debt; cost of borrowing.

Fiscal space and the procyclicality of fiscal policy: the case for making hay while the sun shines

Utilizing data from 133 countries over the period 1950-2014, we identify fiscal space - the ability to pursue active fiscal policy without undermining fiscal sustainability - as a key factor underlying the cyclicality of fiscal policies. We find that less fiscal space induces greater fiscal procyclicality; and the reduction in fiscal space in high income countries in the post-global financial crisis period prevented these economies from adopting countercyclical fiscal policies. We also show that this relationship is non-linear such that countries in the bottom tail of the fiscal space distribution need to make significant improvements before they are able to perform countercyclical policy. Taken together with the increasingly dominant role of fiscal action in downturns, as is highlighted in the context of the responses to the Covid-19 crisis, these findings clearly indicate the importance of building fiscal space in good times to provide capacity for countercyclical policy in bad times

Supply chain networks, trade and the Brexit deal:a general equilibrium analysis

We develop a multi-country general equilibrium model featuring (i) migration flows across borders; (ii) explicit supply chain networks both across sectors and across countries; (iii) services sector with a significant role in both production and trade; and (iv) a separate banking sector. We then carefully calibrate this model to the UK's withdrawal from the EU, guided by the terms specified in the Trade and Cooperation Agreement (TCA), signed in December 2020. We find that supply networks aggravate the losses from trade disintegration significantly, raising the cost of Brexit, even in the absence of tariffs. We also quantify the effects of trade liberalisation between the UK and the third countries, revealing gains, yet, only at a fraction of the losses from the new frictions to the UK-EU trade. Importantly, losses from the UK's exit from the EU are not shared equally and fall disproportionately on low-skilled households.</p

Who Wants an Independent Central Bank? Monetary Policy-Making and Politics.

The costs and benefits of cooperative monetary and fiscal policy are analysed in the framework of a partisan business-cycles model. It is shown that political parties with different ideologies prefer to choose different arrangements for macroeconomic policy-making. More specifically, right-wing parties favour independent central banks more than left-wing parties. An independent central bank is also the generally preferred option from a social welfare point of view. In addition, the form of policy-making arrangements between the fiscal and monetary authorities is shown to influence the extent of partisan cycles. Copyright 2000 by The editors of the Scandinavian Journal of Economics.