This paper is interested in linking formally external disequilibriums to the sovereign debt crisis the EMU is experiencing since 2009. Relying on the CHEER approach that connects the goods market to the capital market, we show that when a country belonging to a monetary union faces external disequilibrium relative to its main partner, the corresponding interest rate differential increases. More...

This paper studies the strategic interaction between a foreign direct investor and a host country. We analyze how the investor can use his control rights to protect his investment if he faces the risk of “creeping expropriation” once his investment is sunk. It is shown that this hold-up problem may cause underinvestment if the bargaining position of the investor is too weak and overinvestment i...

Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance and sovereign default intensity follow a bivariate diffusion with contemporaneous correlation. Estimat...

What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging markets capital flows more efficient? If not, can controls on capital flows improve welfare? This paper studies these questions in a world with two forms of default risk. When private loans are enforceable, but there is the risk of national default, constrained efficient capital ...

What has been the effect of the shift in emerging market capital flows toward private sector borrowers? Are emerging market capital flows more efficient? If not, can controls on capital flows improve welfare? This paper shows that the answers depend on the form of default risk. When private loans are enforceable, but there is the risk that the government will default on behalf of all residents,...

This paper investigates empirically the relationship between the pattern of fiscal policy and the demand for international reserves in developing countries, and how this relationship is associated with political risk and conditional access to global capital markets. It finds evidence that for developing countries with low political risk, countercyclical (procyclical) fiscal policies are associa...

This paper explains why domestic debt composition in some emerging economies is risky. To this end, it carries out a systematic analysis of the determinants of the socalled domestic original sin, which refers to the inability of emerging economies to borrow domestically in local currency, at long maturities and fixed interest rates. The paper builds on a large dataset compiled by the authors fr...

We model sovereign debt in the absence of a bankruptcy code. Threat of trade sanctions and seizure of exports by the lenders are the drivers of enforcement of sovereign debt contracts.The borrower takes these potential actions into account when choosing optimal voluntary default and debt capacity. We obtain a closedform solution for the sovereign yield spreads that depend on the costs of sancti...

This paper argues that the IMF financial and good technical assistance to Russia in the 1990s has been less than generous. Not only the size of the assistance might have not been adequate but also the timing and actual disbursements of these funds were in sharp discord with pledges. More importantly, the IMF made a number of serious policy mistakes in both design and the implementation of the r...

We investigate global factors associated with bank capital ‡ows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of …nancial conditions across borders through banking sector capital ‡ows. A distinctive prediction of the model is that local currency apprec...