The debate over how to manage and resolve crises in emerging markets, under way for the better par f a decade, reached a climax at the spring meetings of the International Monetary Fund (IMF) and World Bank, which were held in Washington in the spring of 2003. Agreement was reached to push ahead with the contractual approach to smoothing the process of sov ereign debt restructuring by promoting the further introduction of collective action clauses (CACs) into bond contracts while continuing to study and develop the statutory approach, in particular the IMF's Sovereign Debt Restructuring Mechanism (SDRM).1 These decisions were shaped by Mex

Harapan tentang pembangunan ekonomi kelompok penting middle income countries telah ditahan kembali oleh arus masuk modal swasta yang subtansial pada tahun 1990-an. Sebagaimana tahun 1970-an, pembangunan ekonomi ini telah diterima dengan optimisme yang berhati-hati. Studi empiris ini membuktikan bahwa meskipun reduksi hutang luar negeri dan reformasi kebijakan di negara-negara debitur telah menjadi determinan penting atas akses yang diperbaharui dalam pasar modal internasional, namun perubahan tingkat bunga internasional telah menjadi faktor yang dominan. Kami menghitung pengaruh perubahan tingkat bunga internasional untuk negara-negara debitur "tertentu". Kesimpulannya bahwa peningkatan tingkat bunga bersamaan dengan kenaikan siklus bisnis di negara-negara industri dapat menekan harga pasar sekunder hutang yang ada ke tingkat yang tidak sejalan dengan arus modal selanjutnya.

AbstractThis article focuses on how the institutional structure of the financial sector and the role of financial intermediation in the Indian economy affect the transmission of monetary policy to the real economy. The article reviews a large amount of empirical literature on monetary transmission within the Indian context (with bank lending and the credit channel being more prevalent). One aspect that emerges from this discussion is that the effect of monetary disturbances on market interest rates, output, and prices, depends on the response of such disturbances to the yield curve. However, recent research on emerging markets shows that long-term rates are not responsive to changes in short-term rates. Thus, monetary policy has smaller effects on output and prices in emerging markets. In the Indian context, the shortcomings of the transmission mechanism further arise because of an underdeveloped financial system and the problem of credit rationing by formal sector banks.

The information content of academic citations is a subject to debate. This article views premature death as a tragic 'natural experiment', outlining a methodology identifying the 'citation death tax' - the impact of the death of productive economists on the patterns of their citations. We rely on a sample of 428 papers written by 16 well-known economists who died well before retirement, during the period 1975 to 1997. The news is mixed: for half of the sample, we identify a large and significant 'citation death tax' for the average paper written by these scholars. For these authors, the estimated average missing citations per paper attributed to premature death ranges from 40% to 140% (the overall average is about 90%), and the annual costs of lost citations per paper are in the range 3-14%. Hence, a paper written 10 years before the author's death avoids a citation cost that varies between 30% and 140%. For the other half of the sample, there is no citation death tax; and for two Nobel Prize-calibre scholars in this second group, Black and Tversky, citations took off over time, reflecting the growing recognitions of their seminal works.

This paper examines how the combination of indebtedness and exogenous shocks induce volatility for the countries of Latin America. A techique for simulating the impact of shocks on the costs of external indebtedness and the response of fiscal policies in adjustment to such shocks is presented and applied to thirteen indebted Latin American countries.

Expatriates are not only sent to industrialized countries with stable environmental conditions, but also to countries that bear high political, social, and even terrorist risk. Despite its practical relevance, the role of expatriates’ families on assignments in terrorism-endangered countries has not been addressed yet. Integrating expatriate literature and family systems theory we investigate the family-related performance antecedents of 121 expatriate managers assigned to a terrorism-endangered country. We find evidence that safety-related intra-family tension significantly impedes expatriates’ work performance. Perceived organizational support can help to diminish this influence. We discuss our results and conclude with further implications for theory and practice.

This paper addresses the usefulness of several proposed domestic measures for protecting emerging market economies against financial crises. These new proposals go beyond traditional macroeconomic policies and include raising foreign currency reserves, establishing contingent lines of international credit, taxing short-term foreign capital flows, and instituting prudential capital controls. We primarily focus on the role of liquidity enhancing measures for managing readily reversible international capital flows and briefly discuss capital controls as an alternative or complementary policy to prevent financial crises. Our analysis relies on three premises. Financial crises may be a by-product of domestic financial reform and international capital market integration and not always the consequence of fundamental inconsistencies in macroeconomic policies. Freely floating exchange rates are difficult to achieve in practice. Near-term measures may be necessary for managing capital flow volatility in addition to sound fiscal and monetary policies during financial liberalization. We reach three main conclusions. Safeguards impose costs on the domestic economy either by raising the cost of capital or by reducing the flow of international capital that may be offset by the benefits of reducing the frequency or severity of financial crises. Liquidity enhancing measures are most appropriate when crises arise as one possibility among "multiple equilibria". The design of self-protection policies is likely to involve a combination of measures that is country specific.

Foreign aid donors and recipient governments often have conflicting objectives. Foreign donors may attempt to influence the policies of recipient governments by offering aid or threatening to suspend aid to sovereign states. This paper considers the credibility of such inducements and the conditioning of aid flows on policy behavior by national governments in the presence of opposing objectives. Aid can be conditioned on past policy actions of the recipient and used to influence the distribution of government resources in a simple repeated agency model. In equilibrium, aid flows are backloaded and reward recipient governments for donor-preferred policy actions. The model is extended to a stochastic setting to allow for asymmetric information between donors and recipients regarding government resources and accumulation of private of foreign assets. This allows for unobserved capital flight implicitly financed by foreign aid inflows by constituents favored by the government. Conditional aid is still feasible and can be enforced by aid suspensions in the presence of potential capital flight.

This paper reconsiders the theory of sovereign debt, default and renegotiation in a setting that motivates conventional bond finance. A tax-smoothing model of government borrowing on international financial markets is used to analyze self-enforcing equilibrium in a private information economy. The main contribution of the model is to show how private debtor information can be used to motivate the implementation of borrowing through the issuance of conventional bonds that are renegotiated only in adverse states after debt has reached a sufficiently high level. The qualitative features of this equilibrium correspond favorably to the empirical experience of sovereign borrowing and default. The paper also considers the role of nominal public debt issues for achieving contingent repayments with unanticipated inflation. It shows that nominal public debt does not lead to unanticipated inflation outside adverse states with already high outstanding public debt.

This paper considers the consequences of international financial market integration for national fiscal and monetary policies that derive from the absence of an international sovereign authority to define and enforce contractual obligations across borders. The sovereign immunity of national governments serves as a fundamental constraint on international finance and is used to derive intertemporal budget constraints for sovereign nations and their governments. It is shown that the appropriate debt limit for a country allows for state-contingent repayment. With non-contingent debt instruments, debt renegotiation occurs in equilibrium with positive probability. A model of tax smoothing is adopted to show how information imperfections lead to conventional bond contracts that are renegotiated when a critical level of indebtedness is reached. Renegotiation is interpreted in terms of nominal and real denominated bonds drawing implications of the intertemporal borrowing constraint for monetary policies, the accumulation of reserve assets and current account sustainability.

This paper evaluates optimal public investment and fiscal policy for countries characterized by limited tax and debt capacities. We study a non stochastic CRS endogenous growth model where public expenditure is an input in the production process, in countries where distortions and limited enforceability result in limited fiscal capacities, as captured by a maximal effective tax rate. We show how persistent differences in growth rates across countries could stem from differential public finance constraints, and differentiate between the case where the public expenditure finances the flow of recurring spending (such as law enforcement), versus the stock of tangible public infrastructure. Although the flow of public expenditure raises productivity, the government should not borrow to finance it as the resulting increase in public debt would lower welfare and the growth rate. With outstanding public debt, the optimal fiscal policy should keep the debt-to-GDP ratio constant in the economy with or without a binding constraint on tax revenues as a share of GDP – current non-durable public goods should be financed only from current revenue. With investment in the stock of public infrastructure, public sector borrowing to finance the accumulation of public capital goods may allow the economy to reach a long-run optimal growth path faster. With a binding tax capacity constraint, if the ratio of the initial public/private sector stock of capital is smaller than the sustainable balanced growth ratio, the optimal policy for the government is to purchase public capital, financed by debt, to immediately attain the sustainable ratio of public capital to private capital. The sustainable steady-state ratio is endogenous to the initial public-to-private capital ratio, the tax capacity and any exogenous debt limit (say, due to sovereign risk). With capital stock adjustment costs, these statements apply to a transition of finite duration rather than an instantaneous stock jump. With either a binding exogenous debt limit or solvency constrained borrowing, a more patient country will have a higher steady-state growth rate but a lower steady-state public-to-private capital ratio.

This paper studies the endogenous determination of financial and trade openness. First, we outline a theoretical framework leading to two-way feedbacks between the different modes of openness; next, we identify these feedbacks empirically. We find that one standard deviation increase in commercial openness is associated with a 9.5 percent increase in de-facto financial openness (% of GDP), controlling for political economy and macroeconomic factors. Similarly, increase in de-facto financial openness has powerful effects on future trade openness. De-jure restrictions on capital mobility have only a weak impact on de-facto financial openness, while de-jure restrictions on the current account have large adverse effect on commercial openness. Having established (Granger) causality, we investigate the relative magnitudes of these directions of causality using Geweke's (1982) decomposition methodology. We find that almost all of the linear feedback between trade and financial openness can be accounted for by G-causality from financial openness to trade openness (53%) and from trade to financial openness (34%). We conclude that in an era of rapidly growing trade integration countries cannot choose financial openness independently of their degree of openness to trade. Dealing with greater exposure to financial turbulence by imposing restrictions on financial flows will likely be ineffectual. for sharing their data. We are grateful for the suggestions of two anonymous referees. We would also like to thank for useful comments we received from

External debt increases the vulnerability of indebted emerging market economies to macroeconomic volatility and financial crises. Capital account reversals often lead sovereign debt repayment crises that are only resolved after prolonged and difficult debt restructuring. Foreign indebtedness exacerbates domestic financial distress in crisis, increasing both the incidence and severity of emerging market crises. These outcomes contrast with the presumption that access to international capital markets should help countries to smooth domestic consumption and investment against macroeconomic shocks. This paper uses models of sovereign to reconsider the role of sovereign debt renegotiation for international risk sharing and presents an approach for analyzing contractual innovations for implementing contingent debt repayments. The financial innovations that might allow risk-sharing rather than risk-inducing capital flows go beyond contractual changes that ease debt renegotiation by separating contingent payments from bonds.

This paper revisits theoretical models of sovereign borrowing with renegotiation and reviews the basis for arguments for market-based contractual innovation in sovereign debt markets. It presents a tax-smoothing model of borrowing on international financial markets by a sovereign government that endogenizes the debt limit for the government. Debt repayments can be state contingent, but these are interpreted in terms of renegotiated conventional bond contracts. The main contribution of the model is to show how private debtor information can be used to motivate the implementation of borrowing through the issuance of conventional bonds that are renegotiated only in adverse states after debt has reached a sufficiently high level. The model is used as a benchmark for considering how opportunistic behavior by individual bondholders can lead to inefficient outcomes. This part of the paper recapitulates how coordination failures arise in theoretical models of sovereign debt from exogenous enforcement of creditor rights. It also discusses how costly delays due to bondholder rent seeking might be mitigated by contractual innovations that address collective action by bondholders using the simple payoffs for renegotiation games.

The IMF attempts to stabilize private capital flows to emerging markets by providing public monitoring and emergency finance. In analyzing its role we contrast cases where banks and bondholders do the lending. Banks have a natural advantage in monitoring and creditor coordination, while bonds have superior risk sharing characteristics. Consistent with this assumption, banks reduce spreads as they obtain more information through repeat transactions with borrowers. By comparison, repeat borrowing has little influence in bond markets, where publicly-available information dominates. But spreads on bonds are lower when they are issued in conjunction with IMF-supported programs, as if the existence of a program conveyed positive information to bondholders. The influence of IMF monitoring in bond markets is especially pronounced for countries vulnerable to liquidity crises.

The role of proportional and procyclic labor income taxes for automatic stabilization with stochastic productivity is analyzed in a contemporary macroeconomic model based on imperfect competition. The importance of short-run nominal wage rigidity for the effectiveness of progressive taxes on labor income for stabilizing output and raising household welfare is examined in a model that yields complete analytical solutions with stochastic output shocks. Increasing the procyclicity of labor income tax rates raises welfare with and without rigid nominal wages in the model economy. With fully flexible prices and wages, a positive covariance between the distortionary tax rate and productivity reduces the volatility of production and employment. This effect disappears under nominal wage rigidity, although progressive taxation can still raise welfare by reducing the distortion caused by a proportional labor tax. With rigid nominal wages and flexible consumer goods prices, payroll taxes levied at rates that rise with output can serve as automatic stabilizers.

This paper argues that the frequent failure of the debt swaps follows from fundamental forces driven by the market's assessment of the scarcity of fiscal revenue relative to the demand for fiscal outlays. As a country approaches the range of partial default, swaps may not provide the expected breathing room and could even bring the crisis forward. Our methodology combines three independent themes: exchange rate crises as the manifestation of excessive monetary injections, the fiscal theory of inflation and sovereign debt. The integrated framework derives devaluation and external debt repudiation as part of a public-finance optimising problem.

This paper examines the relevance of the monetary approach for exchange rate behaviour in India, unde rthe managed float regime. It finds supprot for purchaisng power parity in traded goods and that the monetary approach provdies a reasonable description of exchange rate behaviour in the period of the float, given the deviation from integration of doemstic goods and assets markets from rest of the world

This paper examines the movements of exchange rates and capital flows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities. Our results predict that when faced with increased sterilization costs, the central bank will choose to limit its sterilization activities allowing target variables, such as the nominal exchange rate, to adjust. ; We then test the predictions of a linearized version of the saddle-path solution to the model for a cross-country panel of developing countries. We use IV, GMM and simultaneous equation specifications to allow for the endogeneity of capital inflows. Our results confirm that a monetary policy does respond to sterilization costs.