This study addresses the counterintuitive result produced by the Duffie and Lando (2001) incomplete information model by remodelling its asset density function with added positive bias. We call this new model biased information model. The theory is then applied to study the effect of fiscal opacity on the levels and term structure of sovereign credit spreads. We make use of new panel datasets s...

We assess the sustainability of public finances in the EU15 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edger...

The Economic and Monetary Union (EMU) implies a considerable change in monetary and fiscal policy design in the European Union. With the aid of a two-country version of the Alesina and Tabellini (1987) model, this paper provides a stylized analysis of monetary and fiscal policy interaction in the EMU. It is shown how macroeconomic outcomes are affected by common monetary and fiscal policies, an...

Large changes in government revenues can have disruptive effects on the action of states and increase uncertainty in the economy. In the interwar period, and during the Great Depression years in particular, many countries experienced such events. This paper investigates how the composition of taxes and countries’ fiscal capacity interacted with economic conditions to determine the evolution of ...

Most economists and observers place the lack of fiscal discipline at the core of the recent Argentine crisis. This begs the question of how countries like Belgium or Italy (pre-Maastricht) could run large fiscal deficits and accumulate debts far beyond those of Argentina, without experiencing crises nearly as dramatic as that of Argentina? Why is it that Argentina cannot act like Belgium or Ita...

This paper investigates the macroeconomic challenges created by a surge in aid inflows. It develops an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid—where the central bank controls absorption through monetary policy and the sale of foreign exchange and the fiscal authority controls spending. Different combinations of ab...