6,946 research outputs found
Liquidity when it matters : QE and Tobinâs q
When financial markets freeze in fear, borrowing costs for solvent governments may fall towards zero in a flight to quality â but credit-worthy private borrowers can be
starved of external funding. In Kiyotaki and Moore (2008), where liquidity crisis is captured by the effective rationing of private credit, tightening credit constraints have
direct effects on investment. If prices are sticky, the effects on aggregate demand can be pronounced â as reported by FRBNY for the US economy using a calibrated
DSGE-style framework modified to include such frictions.
In such an environment, two factors stand out. First the recycling of credit flows by central banks can dramatically ease credit-rationing faced by private investors: this is
the rationale for Quantitative Easing. Second, revenue-neutral fiscal transfers aimed at would-be investors can have similar effects. We show these features in a stripped- down macro model of inter-temporal optimisation subject to credit constraints
Fiscal consolidation : Dr Pangloss meets Mr Keynes
A simple dynamic framework is used to show how consolidation plans that are robust
and effective at capacity output can be undermined by demand failure. If the market
panics and interest rates rise, the process can indeed become dynamically unstable.
Tightening fiscal policy to reassure financial markets can lead to a low level
âconsolidation trapâ, however. Better that the Central Bank acts to keep interest rates
low; and that fiscal consolidation efforts be state contingent â allowing room for
economic stabilisation. The pro-cyclicality of fiscal policy could also be reduced if, as
Shiller has argued, debt amortization were state contingent, being indexed to GD
The invisible hand and the banking trade : seigniorage, risk-shifting and more
The classic Diamond-Dybvig model of banking assumes perfect
competition and abstracts from issues of moral hazard, hardly appropriate
when considering modern UK banking. We therefore modify the
classic model to incorporate franchise values due to market power; and
risk-taking by banks with limited liability. We go further to show how
the capacity of franchise values to mitigate risk taking may be undermined
by the bailout option; with explicit analytical results provided
for the case of extreme risk-aversion. After a brief discussion of how
this may impact on the distribution of income, we outline the ways in
which the Vickers Report seeks to remedy these problems
Sovereign Debt Restructuring: New Articles, New Contracts--Or No Change?
It was at the National Economists' Club in November 2001 that Anne Krueger, first deputy managing director of the International Monetary Fund, threw down the gauntlet. "There is," she said, "a gaping hole [in the international financial architecture]-- we lack incentives to help countries with unsustainable debts resolve them promptly and in an orderly way. At present the only available mechanism requires the international community to bail out the private creditors. It is high time this hole was filled."
Capital Flows, Interest Rates and Precautionary Behaviour: a model of "global imbalances"
A dynamic stochastic model of global equilibrium, where countries outside the US face higher risk than the US itself, predicts current account surpluses in the RoW and US deficits. With Loss Aversion, such precautionary savings can cause substantial âglobal imbalancesâ, particularly if there is an inefficient supply of global âinsuranceâ. In principle, lower real interest rates will ensure aggregate demand equals supply at a global level (though the required real interest may be negative). Low interest rates and high savings outside the US appear to be an efficient global equilibrium: but is this sustainable? A precautionary savings glut appears to us to be a temporary phenomenon, destined for correction as and when adequate reserve levels are achieved. But if the process of correction is triggered by âSudden Stopâ on capital flows to the US, might it not lead to the inefficient outcomes forecast by several leading macroeconomists? When precautionary saving is combined with financial panic, history offers no guarantee of full employment.stochastic dynamic general equilibrium, loss aversion, liquidity trap
Eurozone sovereign debt restructuring : promising legal prospects?
The Eurozone debt crisis has stimulated lively debate on mechanisms for sovereign
debt restructuring. The immediate threat of exit and the breakup of the currency union
may have abated; but the problem of dealing with significant debt overhang
remains. After considering two broad approaches - institutional versus contractual â
we look at a hybrid solution that combines the best of both. In addition to debt
contracts with Collective Action Clauses, this includes a key amendment to the Treaty
establishing the European Stability Mechanism, together with innovative state-
contingent contracts and a Special Purpose Vehicle to market them
Sovereign debt restructuring : the Judge, the vultures and creditor rights
What role did the US courts play in the Argentine debt swap of 2005? What implications does this have for the future of creditor rights in sovereign bond markets? The judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity â between holdouts seeking capital gains and institutional investors wanting a settlement â to promote a swap with a supermajority of creditors. Our analysis of Argentine debt litigation reveals a âjudge-mediatedâ sovereign debt restructuring, which resolves the key issues of Transition and Aggregation - two of the tasks envisaged for the IMFâs still-born Sovereign Debt Restructuring Mechanism. For the future, we discuss how judge-mediated sovereign debt restructuring (together with creditor committees) could complement the alternative promoted by the US Treasury, namely collective action clauses in sovereign bond contractsSovereign debt crises ; debt restructuring ; holdout creditors ; collective action clauses
Borrowing from thy neighbour : a European perspective on sovereign debt
European capital markets show increasing concern about the extent
of sovereign debts and their sustainability. Here we explore some
insights that the Overlapping Generations (OLG) framework has to
er on such issues. The OLG framework implies, for example, that
there is a limit to the amount of debt that may be sustained in a
closed economy | with high debt raising interest rates and crowding
out capital formation. But capital market integration with less
indebted partners allows for a fall in interest rates as a result of borrowing
from one's neighbour. Indeed we nd that | in equilibrium
| most of the debt of a high indebted country will be transferred to
partner countries.
Rather like ECB discount policy, our formal analysis is conducted
without taking sovereign default risk properly into account, however.
We go on to discuss three possible sources of default risk | creditor
panic, exogenous interest rate shocks and \over-borrowing" | and we
emphasize the need for comparative statics to be complemented by
disequilibrium dynamics
Prudent banks and creative mimics : can we tell the difference?
The recent financial crisis has forced a rethink of banking
regulation and supervision and the role of financial innovation.
We develop a model where prudent banks may signal their type
through high capital ratios. Capital regulation may ensure separation
in equilibrium but deposit insurance will tend to increase
the level of capital required. If supervision detects risky behaviour
ex ante then it is complementary to capital regulation.
However, financial innovation may erode supervisors' ability to
detect risk and capital levels should then be higher. But regulators
may not be aware their capacities have been undermined.
We argue for a four-prong policy response with higher bank capital
ratios, enhanced supervision, limits to the use of complex
financial instruments and Coco's. Our results may support the
institutional arrangements proposed recently in the UK
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