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International Evidence on Government Support and Risk Taking in the Banking Sector
Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk taking by banks, especially during the financial crisis (2009-10). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.
Quantitative properties of sovereign default models
We study the sovereign default model that has been used to account for the cyclical behavior of interest rates in emerging market economies. This model is often solved using the discrete state space technique with evenly spaced grid points. We show that this method necessitates a large number of grid points to avoid generating spurious interest rate movements. This makes the discrete state technique significantly more inefficient than using Chebyshev polynomials or cubic spline interpolation to approximate the value functions. We show that the inefficiency of the discrete state space technique is more severe for parameterizations that feature a high sensitivity of the bond price to the borro...
The Economics of Sovereign Defaults
Discusses the economics of sovereign defaults, summarizing lessons from existing work on this issue. In particular, the article describes the costs associated with a sovereign default episode, identifies circumstances that are likely to lead to a default, & discusses how understanding sovereign defaults may help to account for distinctive economic features of emerging economies. Charts & tables.
Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies
This paper explores the effects of unconventional monetary and exchange rate policies. We find that official foreign asset purchases have large effects on current accounts that diminish as capital mobility rises and spill over to financially integrated countries. There is an additional effect through the stock of central bank assets. Domestic asset purchases have an effect on current accounts only when capital mobility is low. We also find that rising US bond yields drive foreign yields, stock prices and depreciations, but less so on days of policy announcements. We develop a theoretical model that is broadly consistent with our results.
International Evidence on Government Support and Risk Taking in the Banking Sector
Government support to banks through the provision of explicit or implicit guarantees affects the willingness of banks to take on risk by reducing market discipline or by increasing charter value. We use an international sample of bank data and government support to banks for the periods 2003-2004 and 2009-2010. We find that more government support is associated with more risk taking by banks, especially during the financial crisis (2009-10). We also find that restricting banks' range of activities ameliorates the moral hazard problem. We conclude that strengthening market discipline in the banking sector is needed to address this moral hazard problem.
Sovereign Debt
An intelligent analysis of the dangers, opportunities, and consequences of global sovereign debt Sovereign debt is growing internationally at a terrifying rate, as nations seek to prop up their collapsing economies. One only needs to look at the sovereign risk pressures faced by Greece, Spain, and Ireland to get an idea of how big this problem has become. Understanding this dilemma is now more important than ever, that's why Robert Kolb has compiled Sovereign Debt. With this book as your guide, you'll gain a better perspective on the essential issues surrounding sovereign debt and default through discussions of national defaults, systemic risk, associated costs, and much more. Historical stu...
News and Sovereign Default Risk in Small Open Economies
This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks (NS) affect equilibrium outcomes because they contain info. about the future ability of the gov¿t. to repay its debt. First, in the model with NS not all defaults occur in bad times. Second, the NS help account for key differences between emerging markets and developed economies: as the precision of the news improves the model predicts lower variability of consumption, less counter-cyclical trade balance and interest rate spreads. Finally, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data.
Whatever it Takes
We assess how a major, unconventional central bank intervention, Draghi's "whatever it takes" speech, affected lending conditions. Similar to other large interventions, it responded to adverse financial and macroeconomic developments that also influenced the supply and demand for credit. We avoid such endogeneity concerns by focusing on a third country and comparing lending conditions by euro area and other banks to the same borrower. We show that the intervention reversed prior risk-taking - in volume, price, and loan credit ratings - by subsidiaries of euro area banks relative to local and other foreign banks. Our results document a new effect of large central banks' interventions and are robust along many dimensions.
A General Equilibrium Model of Sovereign Default and Business Cycles
Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments.
