The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank (CB) sets the nominal interest rate and responds to rising government debt/GDP ratios by monetisation. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if t...

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as f...

The market for U.S. Treasury securities is by many measures the largest, most active debt market in the world. At the end of September 1999, the amount of Treasury debt held outside federal government accounts totaled about $3.6 trillion, close to the amount of outstanding debt securities issued by all U.S. corporations combined.1 Moreover, enormous amounts of Treasury securities are traded eve...

Most capital structure models assume that the decision of how much debt to issue is a static choice. In practice, however, firms adjust outstanding debt levels in response to changes in firm value. In this article, we solve for the optimal dynamic capital strategy of a firm and investigate the implications for optimal leverage ratios and the magnitude of the tax benefits to debt. Below, we cons...

We examine the determinants of aggregate corporate capital structure using a novel dataset of accounting and market information that spans most publicly traded firms over the last century. We show that the stability of nonfinancial aggregate leverage over this period reflects two opposing forces. First, regulated sectors, such as railroads, delevered and contracted in size. Second, unregulated ...

Debt/Equity Ratios and Asset Pricing Analysis

Although bank capital regulation permits a bank to choose freely between equity and subordinated debt to meet capital requirements, lenders and investors view debt and equity as imperfect substitutes. It follows that the mix of debt in regulatory capital should isolate the role that the market plays in disciplining banks. I document that since the Federal Deposit Insurance Corporation Improveme...

This paper examines the impact of government policy on the allocation of aggregate risks in a stochastic OG model with production. The market allocation of risk depends significantly on the young generation’s willingness to substitute intertemporally and on government policy. Safe government debt shifts productivity risk from old to young while wageindexed social security is essentially neutral...

Corporate bond markets may suffer from investors’ lack of competence in screening out low-quality issuers. We use data from the Israeli capital market in 1999-2009 to investigate the quality of corporate bond issuers and the role of the institutional investors in the screening process in the corporate bond market. The findings suggest that higher quality firms were more likely to issue bonds, b...