In a country with high probability of default, higher interest rates may render the currency less attractive if sovereign default is costly. This paper develops that intuition in a simple model and estimates the effect of changes in interest rates on the exchange rate in Brazil using data from...

The provision of liquidity by international institutions such as the IMF to countries experiencing balance of payment problems could prevent liquidity runs but could also cause moral hazard distortions: expecting to be bailed out by the IMF, debtor countries would have weak incentives to...

This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low...

Fundamental models of money always exhibit autarkic equilibria where money has no value. In this paper we propose a simple procedure to select among equilibria in such models. Our procedure unveils a natural mapping between equilibrium behavior and the primitives of the economy, thus offering...

This paper empirically investigates the impact of changes in US real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy-induced increases in US interest rates starkly raise default risk in emerging market...

This paper presents a simple macroeconomic model where government spending affects aggregate demand directly and indirectly, through an expectational channel. Prices are fully flexible and the model is static, so intertemporal issues play no role. There are three important elements in the model:...

This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low...

This paper proposes a simple macroeconomic model with staggered investment decisions. The expected return from investing depends on demand expectations, which are pinned down by fundamentals and history. Owing to an aggregate demand externality, investment subsidies can improve welfare in this...

Motivated by a novel stylized fact -- countries with isolated capital cities display worse quality of governance -- we provide a framework of endogenous institutional choice based on the idea that elites are constrained by the threat of rebellion, and that this threat is rendered less effective...