The economic literature provides useful insights into the nature and causes of the current crisis. I am thinking in particular of the literature highlighting the fragility of equilibria and the possibility of self-fulfilling prophecies. A literature that includes the seminal work of Diamond and Dybvig (1983) on bank runs, which has inspired a large number of papers dealing with financial crises...

Premiums on U.S. sovereign CDS have risen to persistently elevated levels since the financial crisis. We ask whether these premiums reflect the probability of a fiscal default – a state in which budget balance can no longer be restored by raising taxes or eroding the real value of debt by raising inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy sta...

In an OLG framework, capital market integration leads to interest rate equalisation as the sovereign liabilities of highly-indebted countries are transferred to partner countries with high savings and low interest rates. Indeed we find that, in equilibrium, the bulk of the existing debt of highly-indebted sovereigns will be transferred to others in this fashion. When account is taken of incenti...

What role did the US courts play in the Argentine debt swap of 2005? What implications does this have for the future of creditor rights in sovereign bond markets? The judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity – between holdouts seeking capital gains and institutional investors wanting a settlement – to promote a swap with a supermajority of creditors. ...

What role did the US courts play in the Argentine debt swap of 2005? What implications does this have for the future of creditor rights in sovereign bond markets? The judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity – between holdouts seeking capital gains and institutional investors wanting a settlement – to promote a swap with a supermajority of creditors. ...

We tackle two questions in this paper: In the sovereign debt crisis, what moves the euro area inflation outlook and has the firm anchoring of medium to long-term inflation expectations been touched? Deriving densities from a new data set on options on the euro area harmonized index of consumer prices provides us with the full distribution of inflation expectations. The daily data set allows us ...

The lack of proper enforcement mechanism for sovereign debt generates a commitment failure. As a result, a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports. Conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure. Formalizing this argument, we show that conditionality helps ...

Using a spillover index approach, we investigate volatility spillovers across China’s stock, bond, commodity futures, and foreign exchange (FX) markets and their evolution during the period 2005–2015. We find that these four financial markets are weakly integrated. The stock market is the largest net sender of volatility spillovers to other markets, followed by the bond market, and the FX and c...