The vast increase in foreign assets globally has raised interest in how the home country should tax profits flowing from these investments. Broadly speaking, countries have chosen either to exempt foreign income from taxation or to subject foreign income to taxation with credits/deductions given for foreign taxes paid. Recent research has focused on the effect of these foreign income tax rules ...

Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduct...

After a steady decline following World War II, the ratio of Canadian public sector debt to GDP reached a minimum of 6% in 1974. Between 1975 and 1995, this ratio increased until it reached a maximum of 81% in 1995. What were the causes of the accumulation of government debt in Canada between 1975 and 1995? How large were the respective contributions of high interest rates, low growth rates, the...

We study an open economy where a pro labor and a pro business candidate compete in an election. The winner chooses taxes, which affect investment returns. Electoral outcomes depend on the size of the foreign debt, but the debt itself reflects expectations about the election. The resulting interaction is novel and has several implications. Elections are associated with increased volatility. Poli...

We model dynamic investment, financing and default decisions of a firm, which begins its life with a collection of growth options. The firm exercises them optimally over time, and finances the costs of investment by adjusting its capital structure, which trades off the tax benefits with the distress cost of debt and the agency cost of investment distortions from potential debt overhang. Conflic...

Although bank capital regulation permits a bank to choose freely between equity and subordinated debt to meet capital requirements, lenders and investors view debt and equity as imperfect substitutes. It follows that the mix of debt in regulatory capital should isolate the role that the market plays in disciplining banks. I document that since the Federal Deposit Insurance Corporation Improveme...

How do di¤erent levels of government debt a¤ect the optimal conduct of monetary and …scal policies? And what do these optimal policies imply for the evolution of government debt over time? To provide an answer, this paper studies a standard monetary policy model with nominal rigidities and monopolistic competition and adds to it a …scal authority that issues nominal non-state contingent debt, l...

Most major types of debt have grown rapidly in recent years. The most publicized aspect of the overall growth in debt has been the unprecedented size of federal government budget deficits. But debt of households and businesses has also grown rapidly, and the debt of developing countries has risen so much that exceptional efforts by international lending agencies, creditors in developed countrie...