Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation...

This paper introduces fiscal policy in a model of sovereign risk spreads (""spreads""). Using panel data from emerging market countries, we find that reductions in public expenditure are a more powerful tool for reducing spreads than increases in revenues. Specifically, cuts in current spending...

This paper examines financial market comovements across European transition economies and compares their experience to that of their regions. Correlations in monthly indices of exchange market pressures can partly be explained by direct trade linkages, but not by measures of other fundamentals....

This paper studies the effect of inflation on the operation of financial markets, and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises. This point is illustrated by presenting a simple model where inflation affects firms’...

We investigate the conditions for sustainability of debt roll-over schemes under uncertainty. In contrast with the requirements identified in recent research, we show that a necessary and sufficient condition for sustainability of such schemes is that the asymptotic interest rate on government...

This paper identifies obstacles hindering the transformation of centrally-planned economies (CPEs) into well-functioning market economies. The obstacles identified relate to (i) anticipatory dynamics, (ii) monetary overhang and the budget, and (iii) underdeveloped credit markets. It is...

Financial institutions intermediate between savers and investors and contribute to corporate governance. Equity and bond markets in the former centrally planned economies are not yet in a position adequately to provide these services. It is not yet clear that investment funds will provide the...

This paper studies under what circumstances creditworthy sovereign borrowers may be denied liquidity by rational creditors. It is shown that, when the creditor side of the market consists of many small investors there may be multiple rational expectations equilibria. In one equilibrium,...

In economies in transition, the development of financial markets is a common objective linking the monetary and fiscal authorities, while monetary and public debt management cannot be strictly separated. This calls for close coordination of objectives and instruments of monetary and debt...

Recoveries vary considerably across countries: our paper compares recoveries in bank-based and market-based economies and finds that market-based economies experience significantly and durably stronger rebounds than the bank-based ones (in particular the more bank-based economies of continental...