Bargaining over the terms of multilateral lending can be a prolonged process. We model failure to come to quick agreement as a screening device. Policy makers who find conditionality especially costly delay to signal their type. We show that increased costs to not reaching agreement, whether...

When the risk premium in the US stock market fell substantially, Shiller (2000) attributed this to a bubble driven by psychological factors. An alternative explanation is that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve which leads...

In the first decade of its existence, the European Monetary System passed through three phases of realignments: full accommodation, partial accommodation, and zero accommodation of inflation differentials. But to what extent does the new freedom of capital movements rule out such gradual...

This paper develops a model where agents learn about the probability of devaluations in a fixed exchange rate regim e. The true probability of devaluation is assumed to be low (or zero) b ut agents are initially unsure about the government's intentions and st art with a high prior belief....

We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. In the face of sovereign default, the need to give appropriate incentives to the debtor leads to excessive 'rollover failure' by creditors. We discuss how the incidence of crises...

Using a variant of the Cagan (1956) model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the...

Collapsing credit markets have been blamed for the depth and persistence of the Great Depression in the United States. Could similar mechanisms have played a role in ending the East Asian economic miracle--and in creating fragility in global financial markets? After a brief account of the nature...

The theory of irreversible investment predicts that development of an oil field should take place when a unique 'price trigger' is passed. At the start of the 1990/91 Gulf War, however, oil prices promptly doubled, only to fall back to their previous level when peace returned six months later....

An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to 'overshoot' equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a 'balance sheet recession'. Besides...