Expectations of bailouts by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can correct these incentives to overborrow when central governments cannot commit and if these rules will arise in equilibrium. We address these questions in a...

This paper examines sovereign lending to Latin America and the Caribbean from 1820 to 1913. We examine four waves of capital flows where defaults were followed by a return to market access. In spite of extended default, countries kept promising high returns that attracted international investors...

This paper studies debt fragility and the sharing of the resulting strategic uncertainty through ex post bailouts. Default arises in equilibrium because of both fundamental shocks and beliefs. The probability of default depends on borrowing rates and, in equilibrium, on the beliefs of lenders...

Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal...

This paper develops a tractable stochastic overlapping generations model to analyze the equilibrium equity premium and growth rate of the capital stock in the presence of a defined-benefit Social Security system. If the Social Security Trust Fund increases the share of its portfolio held in...

High interest rates to defend the exchange rate signal that a government is committed to fixed exchange rates, but may also signal weak fundamentals. We test the effectiveness of the interest rate defense by disaggregating into the effects on future interest rates differentials, expectations of...

The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real...

Conventional wisdom is that good economic conditions or expansionary fiscal policy help incumbents get re-elected, but this has not been tested in a large cross-section of countries. We test these arguments in a sample of 74 countries over the period 1960-2003. We find no evidence that deficits...