Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is...

We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run...

The paper studies the dynamic output effects of public infrastructure investment in a small open economy. We develop an overlapping generations model that includes a production externality of public capital and a wealth effect on labor supply. Public capital enters the firm's production function...

Solow residuals are used as proxies for productivity shocks in many empirical studies.Considering the shortcomings of this approach this paper proposes the common trends approach as an alternative.The common trends econometric technique is utilized here in an attempt to identify and analyze the...

South Africa's 40 years of experience with capital controls on residents and non-residents (1961-2001) reads like a collection of examples of perverse unanticipated effects of legislation and regulation.We show that the presence of capital controls on residents and non-residents, enabled the...

Numerical simulations of the two-country sectoral model are provided for a relatively large number of structural shocks as domestic and foreign productivity shocks in final tradables and non-tradables, money demand shocks and a shock in the exchange rate. Such a model is well suited for monetary...

This paper studies the impact of explicit deposit insurance on market discipline in a framework that resembles a natural experiment.We improve upon previous studies by exploiting a unique combination of country-specific circumstances, design features, and data availability that allows us to...

Recent empirical research on the effects of monetary policy shocks on exchange rate fluctuations have encountered the exchange rate puzzle and th e forward discount bias puzzle.The exchange rate puzzle is the tendency of the domestic currency (of non-US G-7 countries) to depreciate against the...

Discussions of the economic costs and benefits of EMU usually take as their basis the optimum currency area (OCA) approach. This approach starts from the premise that when an external shock hits the economy, it is easier to adjust the exchange rate than domestic prices or wages. Most economists...

We study the effects of public investment in a dynamic overlapping-generations model of a small open economy. Boosting public investment stimulates private capital formation, output, employment, and wages in the long run. The impact effects depend critically on whether public capital is modeled...