Sovereign Debt, Capital Flows and Sudden Stops
Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM
- Chair: Graciela Kaminsky, George Washington University
Sovereign Debt Overhang, Expenditure Composition, and Debt Restructurings
AbstractSovereign debtors' public capital influences defaults and debt restructurings. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that public investment (i) experiences a severe decline and slow recovery, (ii) differs from public consumption and transfers, (iii) reduces its share in public expenditure, and (iv) relates with restructuring delays. We develop a theoretical model of defaultable debt that explicitly embeds public expenditure composition, capital accumulation, and multi-round debt renegotiations. The model quantitively shows that severe decline and slow recovery in public investment, i.e., "debt overhang" delay debt settlement. Theoretical predictions are supported by data.
Productivity and Trade Dynamics in Sudden Stops
AbstractThis paper studies productivity and trade dynamics during sudden stop episodes. Sudden stops of capital inflows to emerging economies are characterized by deep recessions, slow recoveries, sharp devaluations, and reversals in the trade balance. We develop a framework to capture these salient features of sudden stops. The model features endogenous productivity and trade dynamics, and endogenous sudden stops. In this environment, firm and product entry and exit into domestic and export markets play a key role in shaping the dynamic response of the economy to a sudden stop. We discipline the model using unique firm-product level data in both domestic and export markets from a census of manufacturing firms in an emerging economy. The calibrated model matches the key stylized facts of sudden stops and their aftermath.
The Center and The Periphery: Two Hundred Years of International Borrowing Cycles
AbstractA common belief in both academic and policy circles is that cyclical monetary policy in the United States increases the volatility of capital flows to the periphery. More recently, many studies on capital flows also focus on the U.S. Subprime Crisis. These studies emphasize the excessive international borrowing predating that crisis and the dramatic global retrenchment in capital flows in its aftermath. I re-examine these views using a new database I constructed of capital flows spanning two hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages. First, during this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of the central bank in the financial center. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. The evidence from the new database indicates that capital flows to the periphery have become less volatile since the restart of globalization in the 1970s. But not all cycles are less pronounced, only those cycles around panics in the financial center. It is in times of crises at the epicenter that countercyclical monetary policy in the financial center is far more aggressive, with dramatic tightenings predating these crises and drastic easings in their aftermath. This policy cuts short capital flow bonanzas before these crises erupt and mitigates sudden stops in their aftermath.
- F3 - International Finance
- F0 - General