This paper studies the optimal trade-off between commitment and flexibility in an intertemporal consumption/savings choice model. Individuals expect to receive relevant information regarding their own situation and tastes - generating a value for flexibility - but also expect to suffer from...

Many argue that crises -- such as currency attacks, bank runs and riots -- can be described as times of non-fundamental volatility. We argue that crises are also times when endogenous sources of information are closely monitored and thus an important part of the phenomena. We study the role of...

We characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the...

We propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility,...

In this paper, we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions. The political economy frictions involve disagreement and political turnover, while the contracting friction is a lack of commitment regarding...

We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the...

We study the effect of releasing public information about productivity or monetary shocks when agents learn from nominal prices. While public releases have the benefit of providing new information, they can have the cost of reducing the informational efficiency of the price system. We show that,...

We provide a rationale for the observed pro-cyclicality of tax policies in emerging markets and present a novel mechanism through which tax policy amplifies the business cycle. Our explanation relies on two features of emerging markets: limited access to financial markets and limited commitment...

We characterize optimal taxation of foreign capital and optimal sovereign debt policy in a small open economy where the government cannot commit to policy and seeks to insure a risk averse domestic constituency. The expected tax on capital is shown to vary with the state of the economy,...

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,...