Inflation Targeting With Sovereign Default Risk

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Inflation Targeting With Sovereign Default Risk

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Author : Cristina Arellano
language : en
Publisher:
Release Date : 2018

Inflation Targeting With Sovereign Default Risk written by Cristina Arellano and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.

Inflation Targeting And Country Risk

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Author : Mr.Armand Fouejieu
language : en
Publisher: International Monetary Fund
Release Date : 2013-01-23

Inflation Targeting And Country Risk written by Mr.Armand Fouejieu and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-01-23 with Business & Economics categories.

The sovereign debt crisis in Europe has highlighted the role of country risk premia as a link between countries’ fiscal and external balances, financial conditions and monetary policy. The purpose of this paper is to estimate how adoption of inflation targeting (IT) affects spreads. It is hypothesized that country risk premia for IT countries (especially among emerging market economies) may be lower than for other countries owing to greater policy predictability and more stable long-term inflation. The findings suggest that IT reduces the risk premium, both through adoption of the IT regime, and through the observed track record in stabilizing inflation.

Sovereign Debt Risk In Emerging Countries

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Author : Wenéyam Hippolyte Balima
language : en
Publisher:
Release Date : 2015

Sovereign Debt Risk In Emerging Countries written by Wenéyam Hippolyte Balima and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.

Fiscal Limits And Monetary Policy

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Author : Anna Sokolova
language : en
Publisher:
Release Date : 2013

Fiscal Limits And Monetary Policy written by Anna Sokolova and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.

In times of fiscal stress, governments fail to adjust fiscal policy in line with the requirements for debt sustainability. Under these circumstances, monetary policy impacts the probability of sovereign default alongside inflation dynamics. Uribe (2006) studies the relationship between inflation and sovereign defaults with a model in which the central bank controls a risky interest rate. He concludes that low inflation can only be maintained if the government sometimes defaults. This paper follows Uribe (2006) by examining monetary policy that controls a risky interest rate. However, it differs by the baseline assumption about the objectives of the central bank. In this paper, monetary policy is not pure inflation targeting: it is assumed that the central bank minimizes the probability of default under the upper restriction on inflation. An advantage of this framework is that it avoids the issue of zero risk premium, which exists in Uribe (2006), while at the same time allowing a study of the relationship between the constraints on monetary policy, the equilibrium default rate, and the risk premium. We show that monetary policy that controls the risky interest rate can mitigate default risks only when the upper limit on inflation is sufficiently high. The higher the agents believe the upper limit on inflation to be, the lower the equilibrium risk premium and probability of default are. Under a low default rate, constraints on inflation can only be fulfilled when fiscal shocks are either positive or small.

Banks Government Bonds And Default

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Author : Nicola Gennaioli
language : en
Publisher: International Monetary Fund
Release Date : 2014-07-08

Banks Government Bonds And Default written by Nicola Gennaioli and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-07-08 with Business & Economics categories.

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

Monetary Policy And Sovereign Risk In Emerging Economies Nk Default

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Author : Cristina Arellano
language : en
Publisher:
Release Date : 2020

Monetary Policy And Sovereign Risk In Emerging Economies Nk Default written by Cristina Arellano and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.

This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.

A Fiscal Theory Of Sovereign Risk

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Author : Martín Uribe
language : en
Publisher:
Release Date : 2002

A Fiscal Theory Of Sovereign Risk written by Martín Uribe and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Loans, Foreign categories.

This paper presents a fiscal theory of sovereign risk and default. Under certain monetary-fiscal regimes, the risk of default, and thus the emergence of sovereign risk premia, are inevitable. The paper characterizes the equilibrium processes of the sovereign risk premium and the default rate under a number of alternative monetary policy arrangements. Under some of the policy environments considered, the expected default rate and the sovereign risk premium are zero although the government defaults regularly. Under other monetary regimes the default rate and the sovereign risk premium are serially correlated and therefore forecastable. Environments are characterized under which delaying default is counterproductive.

Sovereign Risk And Belief Driven Fluctuations In The Euro Area

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Author : Giancarlo Corsetti
language : en
Publisher: International Monetary Fund
Release Date : 2013-11-06

Sovereign Risk And Belief Driven Fluctuations In The Euro Area written by Giancarlo Corsetti and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-11-06 with Business & Economics categories.

Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.

Essays On Economic Policies And Economy Of Financial Markets In Developing And Emerging Countries

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Author : Weneyam Hippolyte Balima
language : en
Publisher:
Release Date : 2017

Essays On Economic Policies And Economy Of Financial Markets In Developing And Emerging Countries written by Weneyam Hippolyte Balima and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.

This thesis focuses on some critical issues of the access to international financial markets in developing and emerging market economies. The first part provides a general overview of the macroeconomic consequences of one of the most market-friendly monetary policy regime--inflation targeting--using a meta-regression analysis framework. The second part analyses government bond market risk and stability. The last part investigates the disciplining effects of government bond market participation--bond vigilantes. In Chapter 1, the results indicate that the literature of the macroeconomic effects of inflation targeting adoption is subject to publication bias. After purging the publication bias, the true effect of inflation targeting appears to be statistically and economically meaningful both on the level of inflation and the volatility of economic growth, but not statistically significant on inflation volatility or real GDP growth. Third, differences in the impact of inflation targeting found in primary studies can be explained by differences in studies characteristics including the sample characteristics, the empirical identification strategies, the choice of the control variables, inflation targeting implementation parameters, as well as the study period and some parameters related to the publication process. Chapter 2 shows that the adoption of inflation targeting regime reduces sovereign debt risk in emerging countries. However, this relative advantage of inflation targeting--compared to money or exchange rate targeting--varies systematically depending on the business cycle, the fiscal policy stance, the level of development, and the duration of countries' experience with inflation targeting. Chapter 3 shows that remittances inflows significantly reduce bond spreads, whereas development aid does not. It also highlights that the effect of remittances on spreads arises in a regimes of lower developed financial system, higher degree of trade openness, lower fiscal space, and exclusively in non-remittances dependent regimes. Chapter 4 indicates that countries with credit default swaps contracts on their debts have a higher probability of experiencing a debt crisis, compared to countries without credit default swaps contracts. It also finds that the impact of credit default swaps initiation is sensitive to several structural characteristics including the level of economic development, the country creditworthiness at the timing of credit default swaps introduction, the public sector transparency, the central bank independence; and to the duration of countries' experiences with credit default swaps transactions. Chapter 5 shows that bond markets participation encourages government in developing countries to increase their domestic tax revenue mobilization. Finally, it finds that bond markets participation improves the mobilization of internal taxes, compared to tax on international trade, and reduces their instability. Chapter 6 shows that the presence of domestic bond markets significantly reduces financial dollarization in domestic bond markets countries. This effect is larger for inflation targeting countries compared to non-inflation targeting countries, is apparent exclusively in a non-pegged exchange rate regime, and is larger when there is a fiscal rule that constrains the conduct of fiscal policy. Finally, it finds that the induced drop in inflation rate and its variability, nominal exchange rate variability, and seigniorage revenue are potential transmission mechanisms through which the presence of domestic bond markets reduces financial dollarization in domestic bond markets countries.

Managing The Sovereign Bank Nexus

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Author : Mr.Giovanni Dell'Ariccia
language : en
Publisher: International Monetary Fund
Release Date : 2018-09-07

Managing The Sovereign Bank Nexus written by Mr.Giovanni Dell'Ariccia and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-09-07 with Business & Economics categories.

This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.