Recent sovereign default episodes have been associated with substantial output costs. In this paper, we construct a parsimonious …nite horizon model which captures two key market imperfections: (i) the government’s inability to commit to repay debt; (ii) liquidity constraints in the domestic …nancial sector. We use the model to answer two sets of questions. First, we characterize the optimal so...

This paper focuses on sovereign credit risk meaning a hot topic related to the current Eurozone crisis. In the light of the recent financial crisis, market perception of the creditworthiness of individual sovereigns has changed significantly. Before the outbreak of the financial crisis, market participants did not differentiate between credit risk born by individual states despite different lev...

Equity mutual fund loads have fallen, while stock ownership rates and equity mutual fund use have risen, plausibly boosting the stock wealth elasticity of U.S. consumption. Because of limited wealth and diversification needs, load declines likely spurred middle-income families to invest in equity, consistent with cross-section data and the calibration model of Heaton and Lucas (2000). In load-m...

Are natural resources a curse or blessing? The answer may depend on how wealth is managed. By transforming temporary windfall into permanent stock in the form of sovereign fund, resource-rich economies can avoid volatility and Dutch disease effects, save for future generations, invest locally. We review theory behind these resource funds explore empirical evidence their success. Our complemente...