This paper investigates implications of nominal rigidities for the risk premium. We use Obstfeld and Rogoff (1998) type DSGE model equipped with nominal rigidities, imperfect market competitions, a production sector, and a money-in-the-utility function. For a monthly frequency, we generate...

This paper examines the effects that capital inflows have on the financial system in a Diamond-Dybvig environment. Here, an adverse-selection problem arises where short-term capital has the incentive to enter the domestic banking system while long-term capital chooses to stay out. Then,...

The events of the 1990s, which led to the collapse of the banking sector in many countries around the world, have renewed the need to devise some preventive policies. However, the success of these preventive measures is contingent on the predictability of the crisis both in nature and extent....

How do the liquidity functions of banks affect investment and growth at different stages of economic development? How do financial fragility and the costs of banking crises evolve with the level of wealth of countries? We analyze these issues using an overlapping generations growth model where...

If country and currency risk premiums are positively correlated, a negative international liquidity shock harms twice the economy, thereby substantially increasing interest rates. This harmful positive correlation between country and currency risk premiums observed in some countries is called...

The importance of currency and maturity mismatches in the debt structure of emerging markets is an issue that can hardly be overemphasized. Yet, while many papers have explained how imbalances in the asset and liability structure of emerging markets can cause currency and financial crises, the...

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...

This paper examines whether recent international policy initiatives to facilitate financial rescues in emerging market countries have influenced debtors' incentives to access official sector resources. The paper highlights a country's systemic importance as a key characteristic that drives...

This paper examines how the choice of exchange rate regime can signal financial rectitude and, in so doing, influcence a country's ability to borrow internationally in domestic currency. We develop a model in which the constant probability of a 'type change' creates incentives for disciplined...

This paper explores the case of a sovereign indebted country facing a choice of economic policy today that will determine the country's ability to continue its debt servicing in the future. If the sovereign undertakes an unsound economic policy it will repudiate its debt with certainty;...