This paper uses continuous time series data from 1960 to 2011 to evaluate the contributions of foreign income to domestic macroeconomic stability. Foreign income is operationalized as income from major trading partners. Elasticity and absorption models are used to examine the effects of foreign...

This paper studies fiscal policy in a model of sovereign debt and default. A time inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low...

This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low...

A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century’s first global...

In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of sovereign debt. After highlighting conceptual issues that distinguish sovereign debt as well as reviewing a number of empirical facts, we use the model to discuss debt overhang, risk-sharing,...

In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. However, private firms and individuals in developing countries now borrow substantially from foreign lenders. It is often asserted that this surge in private sector borrowing generates...

This paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion (DARA). By incorporating risk averse investors who trade with an emerging economy, the present model...

This paper analyzes the impact of the government debt-to-GDP ratio on the correlation of the fiscal balance and the current account. Above a government debt-to-GDP ratio of 90 percent the correlation of the two balances decreases by 0.16 in a sample of 12 euro area countries and by 0.17 for...

This paper investigates the impact of sovereign defaults on the ability of the corporate sector in emerging nations to finance itself abroad. The hypothesis here is that defaults have a negative spillover effect on the private sector through credit rationing. We explore a novel dataset covering...