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Models of business cycles in emerging economies explain the negative correlation between country spreads and output by modeling default risk as an exogenous interest rate on working capital. Models of strategic default explain the cyclical properties of sovereign spreads by assuming an exogenous output cost of default with special features, and they(More)
We measure of the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with contracts that specify debt-issuance-contingent obligations. First, we calibrate a baseline modeì a la Eaton and Gersovitz (1981) to match features of the data. In the baseline model bonds' values can be diluted. Second, we present a version(More)
We argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bond-holders. By issuing long-term debt, the government lowers the probability of a(More)
We argue that one reason why emerging economies borrow short term is that it is cheaper than borrowing long term. This is especially the case during crises, as in these episodes the relative cost of long-term borrowing increases. We construct a unique database of sovereign bond prices, returns, and issuances at di¤erent maturities for 11 emerging economies(More)
This paper provides welfare theoretic foundations for risk-adjusted capital flow regulations based on a standard class of macroeconomic models of financial crises that exhibit financial amplification dynamics. We show that during crisis episodes when such amplification effects are triggered, decentralized agents do not internalize that capital outflows are(More)
The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as fiscal burden reaches a critical level. Growth collapse is associated with a sudden stop of capital inflows, real depreciation and a drop in output (driven by a fall in the output of nontradables)—all of which(More)
We study theoretically how the adjustment to liberalization of international financial transaction depends upon the degree of domestic financial development. Using a model with domestic and international borrowing constraints, we show that, when the domestic financial system is underdeveloped, capital account liberalization is not necessarily beneficial(More)
  • Fernando A Broner, R Gaston Gelos, Carmen Reinhart, Pierre-Olivier Gourinchas, Alejandro Justitiano, Laura Kodres +2 others
  • 2004
It has frequently been argued that portfolio adjustments by international investors may transmit financial shocks across markets and borders. This notion, however, has not yet been examined with microeconomic data. One plausible mechanism through which shocks may propagate is through the effect of past gains and losses on investors' risk aversion. We test(More)
The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this(More)