We develop a lending game in which relationship-specific investments by firms benefit banks and vice versa. We show that even if all firms and banks prefer high-tech relationship loans under the first-best, asymmetric information and investment non-contractibility make them choose low-tech transaction loans. However, governments with intermediate risk ratings can use Groves subsidies for a conc...

Governments use national debt and the budget deficit as measures of fiscal position. But what should government policy aim to achieve with respect to these measures? Are these the right summary measures at which to be looking? This paper considers what the government should use as its fiscal targets to achieve policies that are consistent with long-term fiscal objectives. Among its findings are...

Government guarantees of private debt deplete equity. The depletion is greatest during periods when the probability of a guarantee payoff is highest. In a setting otherwise subject to Modigliani-Miller neutrality, firms issue guaranteed debt up to the limit the government permits. Declines in asset values raise debt in relation to asset values and thus deplete equity directly, under the realist...

Through a cost-minimizing approach, this paper derives four joint indicators to assess the ef…ciency of the mix of sovereign debt currencies between the countries belonging to the European Monetary Union (EMU). This theoretical insight enables us to explain why and how the introduction of the euro and the adoption of a common monetary policy may have led to signi…cant changes in debt structure ...

We study a preferred equity infusion government program set to mitigate interbank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to the risk of bank runs. The government seeks to maximize, under budget constraints, the total net worth of the financial system or, equivalently, to minimize the dead-weight losses induced by bank r...

Recent empirical evidence suggests that the major cost of sovereign default lies in its effects on the domestic financial system, rather than any external sanctions. To explore this link, we extend the banking model of Gertler and Karadi (2011) to allow banks to hold risky long-term government debt, and then incorporate bank runs following Gertler and Kiyotaki (2013). Banks face an agency probl...

This paper analyses the European financial crisis through the lens of the sovereign bond liquidity. Using novel data we show that government securities are the prime collateral in the European repo market, which is becoming a primary source of funding for the banking system in the Euro area. We document that the repo haircuts on peripheral government bonds sharply increased during the crisis, r...

the main purpose of the study is to examine the causal relationship between government revenues and expenditures of the jordan government over the period from 1990 to 2011 using granger causality and vecm tests methodology. which provides channels of causation between government revenues (gr) and government expenditures (ge).the empirical results show that bidirectional causality running betwee...

Recent sovereign default episodes have been associated with substantial output costs. In this paper, we construct a parsimonious …nite horizon model which captures two key market imperfections: (i) the government’s inability to commit to repay debt; (ii) liquidity constraints in the domestic …nancial sector. We use the model to answer two sets of questions. First, we characterize the optimal so...