This paper explores the role of bank balance sheets, sovereign default risk, and capital adequacy requirements in amplifying aggregate fluctuations. The paper, first, proposes a unified model of defaultable sovereign debt and bank balance sheets to capture regularities on bank credit to firms,...

This paper develops a model of optimal government debt maturity in which the government cannot issue state-contingent bonds and the government cannot commit to fiscal policy. In contrast to an environment with full commitment, there is a tradeoff between the cost of funding and the benefit of...

Yes. Using the workhorse Smets and Wouters (2007) model of the U.S. economy, we find that the role of the output gap should be equal to or even more important than that of inflation when designing a simple loss function to represenst household welfare. Moreover, we document that a loss function...

This paper provides a new framework to study the term structure of interest rate spreads and the maturity composition of sovereign bonds. As observed in the literature, sovereign interest rate spreads increase during crises, with short term interest rate spreads rising more than long term...

This paper studies the link between banking crises, sovereign default and government guarantees. A banking crisis can lead to a domestic credit crunch, which can be mitigated by government guarantees. However, the provision of bailout guaran- tees exposes the government to potentially severe...

This paper studies the maturity, timing and relative size of repayments for sovereign debt. Using Bloomberg bond data for emerging economies, we document that sovereigns issue debt with shorter maturity but more back-loaded repayments during downturns. To account for this pattern, we study a...

We analyze the optimal capital structure and investment strategy of banks and other financial institutions. We develop conditions under which banks optimally choose a fragile capital structure that is subject to runs. We show that when bank depositors have limited ability to commit to long-term...

The leading theories on monetary policy non-neutrality require some degree of price rigidity, which is often introduced by assuming fixed costs of price adjustment, also known as menu costs. Empirical evidence on the existence of such menu costs is scarce. Using weekly data on prices, costs and...

We construct a microfounded, dynamic version of the IS-LM-Phillips curve model by adding two elements to the money-in-the-utility-function model of Sidrauski (1967). First, real wealth enters the utility function. The resulting Euler equation describes consumption as a decreasing function of the...

International trade and the internal movement of goods and people are closely related. China – increasingly open and with massive internal migration flows – provides an ideal setting to study these interrelationships. We develop a general equilibrium model of internal and external...