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Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence,...
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We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central … bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central … bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current …
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