Deterministic debt cycles in open economies with flow collateral constraints

Endogenous debt constraints in collateralized economies with default penalties

In infinite horizon financial markets economies, competitive equilibria fail to exist if one does not impose restrictions on agents’ trades that rule out Ponzi schemes. When there is limited commitment and collateral repossession is the unique default punishment, Araujo, Páscoa and Torres-Mart́ınez (2002) proved that Ponzi schemes are ruled out without imposing any exogenous/endogenous debt cons...

Collateral Constraints, Debt Management and Investment Incentives

This paper analyses the hedging decisions of an emerging economy which is exposed to market risks and whose debt contract is subject to collateral constraints. Within a sovereign debt model with default risk and endogenous collateral, we study the optimal choice of hedging instruments when both futures and non-linear derivatives are available. We examine in which way the hedging policy is affec...

News and Business Cycles in Open Economies

Debt, Deficits, and Destabilizing Monetary Policy in Open Economies

Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint...

Collateral, liquidity and debt sustainability

We study the sustainability of public debt in a closed production economy where a benevolent government chooses fiscal policies, including haircuts on its outstanding debt, in a discretionary manner. Government bonds are held by domestic agents to smooth consumption over time and because they provide collateral and liquidity services. We characterize a recursive equilibrium where public debt am...