The simultaneous determination of financial default and political crises is studied in an open economy model. Political crises accompany default in equilibrium because of an information transmission conflict between the government and the public. Multiple equilibria are possible: if foreign lenders are pessimistic about the country’s stability, they demand a high interest on the debt, exacerbat...

This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which ...

This paper studies the efficacy of China’s financial reforms in helping the central monetary authority to achieve its goals of macroeconomic stabilization. A local–local monetary game is presented which examines the investment competition between local governments in different hypothetical financial settings. It is shown that direct means of credit control and indirect instruments of monetary p...

I study the effects of long-run inflation and income taxation in an economy where households face uninsurable idiosyncratic risks. I construct a tractable competitive search framework that generates dispersion of prices, income and wealth. I analytically characterize the stationary equilibrium and the policy effects on individual choices. Quantitative analysis finds that monetary and fiscal pol...

This paper studies an international tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfareimproving active tax policies, in particular capital and labor income tax, under the non-cooperative Nash equilibrium and the cooperative equilibrium. Unlike the conventional wisdom regarding stabilizat...

Ž . The paper uses new cross-country data on income and asset land distribution to show Ž . that i there is a strong negative relationship between initial inequality in the asset Ž . distribution and long-term growth; ii inequality reduces income growth for the poor, but Ž . not for the rich; and iii available longitudinal data provide little support for the Kuznets hypothesis. Policies that in...

In this paper I analyze the impact of increasing government infrastructure investment by using existing large foreign exchange reserves in a fully optimizing model matching the Chinese economy. Even though the private investment falls in the nontradable sector, real expenditure and money balance decrease in the short run, the infrastructure investment greately enhances the efficiency and produc...

Exploiting the analogy with the private provision of a public good, this paper studies debt restructuring with an arbitrary number of creditors using mechanism design. Creditors differ in the value they expect to receive in bankruptcy, and this value is private information. As with public goods, too little debt forgiveness is granted in equilibrium relative to the first best. Creditors are more...

This paper determines optimal public debt in a life cycle model with incomplete markets that matches the empirically observed variation consumption, labor, and savings. We find savings—not debt—equal to 168 percent of output is optimal, primarily due influence on household decision-making. By inducing lower interest rate, savings slow consumption leisure growth over an average household’s lifet...

This paper studies whether the central bank should adjust its inflation target to account for the systematic upward bias in measured inflation due to quality improvements in consumption goods. We show that the answer to this question depends on what prices are assumed to be sticky. If nonquality-adjusted prices are assumed to be sticky, then the inflation target should not be corrected. If, on ...