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We explore the optimal and actual responses of fiscal policy to changes in the interest rate on newlyissued public debt (the “marginal interest rate”). We set up a simple theoretical framework with a government aiming to smooth public consumption over time. The distinctive feature is that the government issues debt of different maturities. This introduces a “valuation effect” that has received little attention so far: a rise in the marginal interest rate increases the rate of discounting and, thus, lowers the value of non-maturing debt, which relaxes the budget constraint, thereby inducing a fall in the primary balance. Still, the framework predicts that the total effect of a rise in the marginal interest rate is an increase in the primary balance. Estimates for developed countries suggest that a 1 percentagepoint higher marginal interest rate leads, on average, to roughly a 1 percentage-point higher primary balance. These findings are consistent with governments smoothing the impact of changes in the marginal interest rate and exploiting the valuation effect. Finally, estimates suggest a role for the average (or “effective”) interest rate on outstanding debt. info:eu-repo/semantics/publishedVersion

We study the role of government debt maturity in currency unions to identify whether debt management can help governments hedge their budgets against spending shocks. We first use a novel and detailed dataset of debt portfolios of five Euro Area countries to run a battery of VARs, estimating the responses of holding period returns to fiscal shocks. We find that government portfolios, which in our sample comprise mainly of nominal assets, have not been effective in absorbing idiosyncratic fiscal risks, whereas they have been very effective in absorbing aggregate risks. To shed light on this finding, as well as to investigate what types of debt are optimal in a currency area in the presence of both aggregate and idiosyncratic shocks, we setup a formal model of optimal debt management with two countries, benevolent governments and distortionary taxes. Our key finding is that governments should focus on issuing inflation indexed long term debt since this allows them to take full advantage of fiscal hedging. When we look at the data we find a stark increase in the issuance of real long term debt since the beginning of the Euro in many of the countries in our sample, which our model explains as an optimal response of governments to the introduction of the common currency.

In this paper, we revisit the fiscal theory of the price level (FTPL) within the New Keynesian (NK) model. We show in which cases the average maturity of government debt matters for the transmission of policy shocks. The central task of this paper is to shed light on the theoretical predictions of the maturity structure on macro dynamics with an emphasis on model-implied expectations. In particular, we address the transmission channels of monetary and fiscal policy shocks on the interest rate and inflation dynamics. Our results illustrate the role of the maturity of existing debt in the wake of skyrocketing debt-to-GDP ratios and increasing government expenditures. We highlight our results by quantifying the effects of the large-scale US fiscal packages (CARES) and predict a surge in inflation if the deficits are not sufficiently backed by future surpluses.

We develop tools for computing equilibrium bond prices for the discrete-time version of the Vayanos–Vila (2009) model. With the maturity structure included in pricing factors, factor loadings for equilibrium bond yields depends critically on parameters describing maturity structure dynamics and other model parameters. An illustrative example shows that the effect on the yield curve of a supply shock originating in a given maturity, although hump-shaped around the originating maturity, is to change yields broadly across all maturities., JEL Classification Codes: E43, E58, G12, This paper was formerly circulated as “Affine Term Structure Pricing with Bond Supply As Factors”(Center for Quantitative Economic Research Working Paper 16-01, Federal Reserve Bank of Atlanta, April 2016)., The research reported here was supported by grants-in-aid from the Ministry of Education, Culture, Sports, Science, and Technology of the Japanese government (grant number 25285097 and 26870124)., http://www.grips.ac.jp/list/jp/facultyinfo/hayashi_fumio/

Trabajo presentado en el 8th Shanghai Macroeconomics Workshop, celebrado en Shanghai (China), del 17 al 19 de junio de 2017.--Trabajo presentado en el Government Debt: Constraints and Choices, organizado por la Universidad de Chicago durante los días 21 y 22 de abril de 2017.--This version: October 2018 (November 2014), Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue ( r/r ) new ones. These features of DM are inconsistent with US data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this paper is introducing a novel computational method to find global solutions., Faraglia gratefully acknowledges support from the Cambridge Endowment of Research in Finance (CERF), Marcet from Plan Nacional (Spanish Ministry of Science), Monfispol, AGAUR (Generalitat de Catalunya), the Axa Foundation, the Excellence Program of Banco de Espa˜na, European Research Council under the EU 7th Framework Programme (FP/2007-2013) Advanced ERC Grant Agreement n. 324048 - APMPAL and the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563) and Scott from the ESRCs World Economy and Finance program.

We study the impact of debt maturity on optimal fiscal policy by focusing on the case where the government issues a bond of maturity N > 1: Isolating these effects helps provide insight into the construction of optimal government debt portfolios. We find long bonds may not complete the market even in the absence of uncertainty, generate an incentive to twist interest rates and induce additional tax volatility compared to short term bonds. By focusing just on the issuance of long bonds we show that as well as their well known advantage in providing fiscal insurance long bonds also have less attractive features that induce additional tax volatility. In the case of long bonds, governments induce tax volatility in order to twist interest rates at maturity. This interest rate twisting effect is what makes optimal debt management models so difficult to solve computationally as the state space rapidly becomes cumbersome due to the need to keep track of promises about future tax rates. We provide an alternative institutional setup (\independent powers\) that eliminates this problem offering a simpler solution method. Introducing maturity requires making more institutional assumptions than is the case for one period bonds. In particular assumptions have to be made whether the government does or doesn't buy back each period all outstanding debt irrespective of maturity and whether long bonds pay coupons. This is important as the literature to date makes assumptions that are diametrically opposite to what is observed in practice. We show that this is an important divide as if we model optimal policy under the empirically motivated assumption that governments do not buyback bonds until maturity then long bonds induce additional tax volatility due to the existence of N period roll over cycles. These can be reduced in magnitude by the government issuing long bonds that pay coupons although because coupons reduce the duration of a bond below its maturity this does compromise the ability of long bonds to provide fiscal insurance.

Do governments strategically choose debt maturity to fill supply gaps across maturities? Building on a new panel data set of more than 9,000 individual Eurozone government debt issues between 1999 and 2015, I find that governments increase long-term debt issues following periods of low aggregate Eurozone long-term debt issuance, and vice versa. This gap-filling behavior is more pronounced for (1) less financially constrained and (2) higher rated governments. Using the ECB's three-year LTRO in 2011-2012 as an event study, I find that core governments filled the supply gap of longer maturity debt, which resulted from peripheral governments accommodating banks' short-term debt demand for "carry trades". This gap-filling implies that governments act as macro-liquidity providers across maturities, thereby adding significant risk absorption capacity to government bond markets.

This paper characterizes the optimal bailout maturity structure for a sovereign on the verge of a default. I find that buying back long-term debt is strictly optimal when it can prevent a default today and in the future. Otherwise, buying back short-term debt is optimal and can prevent a default only today. The paper also investigates the choice of debt maturity structure of the sovereign in the presence of bailouts. I find that potential bailouts extend the sovereign’s borrowing capacity and make it rely more on debt with shorter maturities on average. As short-term debt is vulnerable to rollover crises, it generates more default risk. Eventually, the paper analyses how potential bailouts affect ex post welfare and studies ex ante welfare-improving policies. The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

Developing countries are trying to develop long-term financial markets and institutional investors are expected to play a key role. This paper uses unique evidence on the universe of institutional investors from the leading case of Chile to study to what extent mutual funds, pension funds, and insurance companies hold and bid for long-term instruments and which factors affect their choices. Using monthly asset-level portfolios we show that, despite the expectations, mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing has averaged higher returns. Thus, expanding large institutional investors does not necessarily imply more developed long-term markets.

Using a data set covering about 277,000 firms across 79 countries over the period 2004-11, this paper examines the evolution of firms capital structure during the global financial crisis and its aftermath in 2010-11. The study finds that firm leverage and debt maturity declined in advanced economies and developing countries, even in countries that did not experience a crisis. The deleveraging and maturity reduction were particularly significant for privately held firms, including small and medium enterprises. For small and medium-size enterprises, these effects were larger in countries with less efficient legal systems, weaker information-sharing mechanisms, shallower banking systems, and more restrictions on bank entry. In contrast, there is weaker evidence of a significant decline of leverage and debt maturity among firms listed on a stock exchange, which are typically much larger than other firms and likely benefit from the spare tire of easier access to capital market financing.

The Lebanon Economic Monitor provides an update on key economic developments and policies over the past six months. It also presents findings from recent World Bank work on Lebanon. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy on the outlook for Lebanon. Its coverage ranges from the macro-economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Lebanon.

This paper empirically examines the determinants of credit at different maturities across European Union countries during the last decade. The paper documents the lengthening of maturities since the early 2000s, and whether these patterns were driven by similar factors in advanced countries and in emerging market countries. Before the 2008 crisis, long-term credit expanded faster than short-term credit in most countries in the sample, and contracted less than short-term credit after 2008. The paper finds that domestic deposits and foreign liabilities were more important sources of funding in emerging market countries than in advanced countries. Moreover, trade openness and initial banking sector depth matter more for emerging market countries than for advanced countries.

How many and which firms issue equity and bonds in domestic and international markets, how do these firms grow relative to non-issuing firms, and how does firm performance vary along the firm size distribution? To evaluate these questions, a new data set is constructed by matching data on firm-level capital raising activity with balance sheet data for 45,527 listed firms in 51 countries. Three main patterns emerge from the analysis. (1) Only a few large firms issue equity or bonds, and among them a small subset has raised a large proportion of the funds raised during the 1990s and 2000s. (2) Issuers grow faster than non-issuers in assets, sales, and employment, that is, firms do not simply use securities markets to adjust their financial accounts. (3) The firm size distribution of issuers evolves differently from that of non-issuers, tightening among issuers and widening among non-issuers.

This article reviews the main issues of regulating and supervising banks in emerging markets with a view toward evaluating the long-run options. Particular attention is paid to Latin America and East Asia. These economies face a severe policy commitment problem that leads to excessive bailouts and potential devaluation of claims of foreign investors. This exacerbates moral hazard and makes a case for importing external discipline (for example, acquiring foreign short-term debt). However, external discipline may come at the cost of excessive liquidation of entrepreneurial projects. The article reviews the tradeoffs imposed by external discipline and examines various proposed arrangements, such as narrow banking, foreign banks and foreign regulation, and the potential role for an international agency or international lender of last resort. Liberalization and integration of financial markets have been associated with an increase in capital movements and with the financial crises. In particular, surges in foreign short-term debt have been blamed for crisis episodes in emerging economies in Asia (Thailand, Indonesia, and the Republic of Korea) and Latin America (Mexico, Brazil, Ecuador, and Argentina), as well as in the periphery of Europe (Turkey). These crises have proved costly in terms of output. Several policy responses have been suggested. Among them have been the reduction of short-term debt, the development of stock markets, the improved regulation and supervision of domestic financial system, enhanced transparency requirements and market discipline, and the establishment of an international lender of last resort. A catalog of “solutions” has been proposed to take care of the problems of banking in emerging market economies including moving to a narrow bank system, building a currency union, and leaving banking in the hands of foreign banks and offshore institutions. This article identifies policy responses tailored to the needs of emerging market and developing economies. The question is whether the regulatory policies and

Recent research suggests that management of the public sector debt can have important effects on a country macroeconomic performance. This Public debt management and macroeconomic stability article provides an overview of the factors that the recent literature has identified as important in determining the optimal composition of the public debt. Based on this analysis, it attempts to establish general guidelines for public debt management in emerging economies. To retain market access and promote domestic financial market development, governments should generally finance themselves at market rates using a wide variety of securities. Beyond this general principle, the optimal composition of the public debt involves a tradeoff between enhancing the government anti-inflationary credibility and reducing the vulnerability of its budget to macroeconomic shocks. Consequently, the optimal composition of the debt depends on a country circumstances. Debt should be heavily weighted toward long-term nominal securities for governments that have anti-inflationary credibility and toward long-term indexed debt for those that do not.

We show how to model portfolio models in the presence of long bonds. Specifically we study optimal fiscal policy under incomplete markets where the government issues bonds of maturity N > 1. Assuming the existence of long bonds introduces an additional intertemporal mechanism that makes taxes more volatile in order to achieve lower debt management costs. In other words, fiscal policy is secondary to debt management. Modelling optimal policy with long term bonds is computationally demanding because of the promises made to cut future taxes. The longer the maturity of bonds the more promises need to be monitored and the larger the state space. We consider three means of overcoming this problem - a computational method using the “condensed PEA”, an approximation whereby long bonds are modelled as a sequence of geometrically declining coupons and a model of independent powers where the fiscal authority and interest rate setting authority are separate. We compare the accuracy and properties of solutions across these three approaches and examine how the properties of optimal fiscal policy differ in the case of long bonds compared to one period debt.

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. The theory is similar in spirit to, but distinct from, unpleasant monetarist arithmetic and the fiscal theory of the price level. Because the assumption of imperfect knowledge breaks Ricardian equivalence, details of fiscal policy, such as the average scale and composition of the public debt, matter for inflation. As a result, fiscal policy constrains the efficacy of monetary policy. Heavily indebted economies with debt maturity structures observed in many countries require aggressive monetary policy to anchor inflation expectations. The model predicts that the Great Moderation period would not have been so moderate had fiscal policy been characterized by a scale and composition of public debt now witnessed in some advanced economies in the aftermath of the 2007-09 global recession.

Swiss Confederation Ukraine has extensive public infrastructure inherited from the Soviet times but much of it has fallen into disrepair over the past decades and needs major rehabilitation or replacement so that growth may continue. Creating fiscal space for investing more is one of the critical tasks that facing the country, but a constrained fiscal space together with the use of investments as a stimulus for growth call for more efficiency in public investment management practices. There are a number of fundamental issues that need to be addressed if Ukraine is to make progress in its reform ambitions for public investment management (PIM). The most significant are: (1) most projects avoid scrutiny due to loopholes in classification (lack of definition of a public investment project); (2) there is no effective economic appraisal and appraisal review procedures in place due to limited human resource (HR) capacity, and no common technical standards; (3) the PIM system does not seem to block new projects from entering the budget but allows ministries to delay ongoing ones and squeeze in new ones; and (4) lack of strategic guidance with which to prioritize complicates project selection. One of the fundamental building blocks of a sound PIM system is a clear, legal definition of what counts as a public investment project and what does not. It should be pointed out that this already high discrepancy is only a comparative measure of input values. Developing projects that are output and performance driven should yield even greater efficiencies. Between 2000 and 2008, Ukraine was an average growth performer in a fast growing region, with gross domestic product (GDP) growth averaging 7 percent. As the global financial crisis hit the Ukrainian economy it contracted by 15 percent in 2009, exposing its underlying macroeconomic and structural vulnerabilities. As a result of the insufficient structural transformation and impact of the economic crisis, Ukraine now faces substantial fiscal pressures that threaten economic stability and growth. The Government of Ukraine recognized the need for a modern public financial management (PFM) system and put considerable emphasis on several aspects of PFM reforms. Training for the development of capacity in the PIM system is tricky in Ukraine. It is becoming clear that due to the dynamic nature of the Ukrainian civil service, officials are rapidly moving from one area of the Administration to another.

Russia's economic growth slowed in the second quarter of 2011 as the inventory restocking cycle waned. High oil prices have kept the external current account in surplus but capital outflows continue. Gradually improving labor market conditions and access to credit and external borrowing are supporting domestic consumption but consumer confidence and external risks are constraining a more robust growth in domestic demand. Inflation is on a downward trend because of seasonal factors. The short-term fiscal situation is favorable mainly because of high oil prices with an almost balanced budget this year. But a large non-oil deficit requires concerted medium-term fiscal adjustment to replenish fiscal buffers and to move toward long-term sustainable levels of the non-oil deficit.

Russia has seen even higher oil windfall in the past few months, which translates into likely fiscal surpluses this year and next. The government should not miss the opportunity provided by a large oil windfall to substantially improve its long-term fiscal position, further reduce inflation, and, therefore, ensure a strong basis for durable stability and healthy growth in the future. Rising domestic demand and credit activity are increasingly supporting solid growth. Overall, labor market conditions improved recently while poverty was broadly flat during and after the crisis, but unemployment and poverty in many regions remain difficult. Further reductions in poverty will require greater policy focus and persistence in implementing more effective and targeted programs, especially in the poorest regions. Two new special-topic analyses focus on export diversification in Russia, and food and energy inflation in Europe and Central Asia region. In the first, results show that productivity is the key to exports and that lack of competition and entrepreneurial innovation are relevant obstacles to the emergence of new, potentially exportable products. In the second, it is shown that food and energy prices in Russia and other countries in Europe and Central Asia are contributing significantly to consumer price inflation, complicating anti-inflation policy and poverty reduction.

We develop an infinite horizon model of an economy in which banks finance long term assets by placing non-tradable debt among savers. Banks choose the overall principal, interest rate, and maturity of their debt taking into account two opposite forces: (i) investors' preference for short maturities (which stems from their exposure to preference shocks) and (ii) banks' exposure to systemic liquidity crises (during which debt refinancing becomes specially expensive). Importantly, the terms of access to refinancing during crises depend endogenously on banks' aggregate refinancing needs. Due to pecuniary externalities, the unregulated equilibrium exhibits inefficiently short debt maturities. We analyze the possibility of restoring efficiency or improving welfare by means of limits to debt maturity, Pigovian taxes, and liquidity insurance schemes.

This paper examines how the scale and composition of public debt can affect economies that implement a combination of passive monetary policy and active fiscal policy. This policy configuration is argued to be of both historical and contemporary interest in the cases of the U.S. and Japanese economies. It is shown that higher average levels and moderate average maturities of debt can induce macroeconomic instability under a range of policies specified as simple rules. However, interest rate pegs in combination with active fiscal policies almost always ensure macroeconomic stability. This finding suggests that in periods where the zero lower bound on nominal interest rates is a relevant constraint on policy design, a switch in fiscal regime is desirable.

In the post-global economic crisis environment, Vietnam's economy continues to grow at a reasonably rapid and stable rate. While the speed of global economic recovery has been uneven across the world, Asia as a region has done particularly well. And within Asia, Vietnam's growth performance continues to be impressive. As shown in left panel of, Vietnam was one of the fastest growing economies in the East Asia and Pacific (EAP) region prior to the global economic crisis and has remained so in the post-crisis period as well1. After registering a real gross domestic product (GDP) growth of 5.3 percent in 2009, Vietnam's economy is expected to grow between 6.5-6.7 percent in 2010. Vietnam, like China, stands out not only for achieving a higher average growth rate but also a more stable growth path. This however has meant that the speed with which the Vietnam's economy is bouncing back from the lows of 2009 appears to be less impressive than countries that experienced negative growth last year. This edition of 'Taking Stock' a semi-annual publication from the World Bank attempts to understand the recent macroeconomic changes in Vietnam. It documents changes to the macroeconomic outcomes and policies with a view to inform policy discussions in the country. The analysis is mostly retrospective in nature, though discussions on prospective challenges and outlook are also briefly mentioned. Developments in the global economy in general and in the EAP region in particular are juxtaposed against Vietnam's own economic outcomes and policies to provide a more complete and nuanced picture of the issues.

India's economic performance in FY2009/10 shows that the recovery from the slowdown during the global financial crisis is well underway. India's Gross domestic Product (GDP) growth in FY2009/10 has beaten expectations by reaching 7.4 percent compared with 6.7 percent in the previous year. In particular, agricultural sector growth was better than feared with a slightly positive growth rate despite the worst monsoon shortfall in three decades. Strong growth in the fourth quarter pushed annual GDP growth to 7.4 percent in 2009-10. Fourth quarter growth reached 8.6 percent (y-o-y), the highest quarterly growth rate since the end of FY2007/08. The industrial sector's robust recovery beat expectations. Growth in the last quarter of fiscal year FY2009/10 was an unexpectedly high 13.3 percent resulting in over 12 percent growth in the second half of year, nearly double the 6 percent growth witnessed in the first half. Higher inflation mars the bright picture, but there are clear indications of moderation. Inflation as measured by the wholesale price index (WPI) averaged 10 percent during February-May 2010. India's recovery after the slowdown seems well underway. Growth is projected to climb to 8-9 percent in the next two years. These growth rates are achievable without a renewed build-up of inflationary pressure as long as agricultural growth returns to trend, infrastructure constraints are alleviated, and international prices remain stable. Over the next year, sources of growth will shift from fiscal stimulus to manufacturing and, possibly a recovering agriculture.

A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these positions but at the cost of introducing extreme volatility in asset holdings. Across these simulations we find no presumption that governments should issue long term debt - policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc..Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.

I analyze how lack of commitment affects the maturity structure of sovereign debt. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short- versus long- term debt affects default and rollover decisions by subsequent policy makers. The equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that reflect the price impact of these decisions. The model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high, output low, or a cross default more likely. These predictions are consistent with empirical evidence.

Public debt profiles have improved in Bolivia recently; in particular by extending the maturity structure and increasing the proportion of debt issued in domestic currency. This paper analyzes trends in public domestic debt in Bolivia since 2000, and the role of macroeconomic fundamentals and the debt management strategy adopted by the authorities. We analyze their role using transfer function models that suggest that both were critical in improving debt profiles, in particular the strengthening of the fiscal and international reserves positions, the recent appreciation of the Boliviano, and new prudential regulation that promotes the use of the latter. We also compare debt profiles with other countries in Latin America, and found that there is still room for improvement, both in terms of maturity structure and currency composition.

Using data from Germany this paper examines the direct effect of non-financial firms' use of short-term versus long-term liabilities. We develop a structural model of a firm's value maximization problem that predicts that profitability of the firm will change if firms alter their use of short-term versus long-term liabilities. We find that firms that rely more heavily on short-term liabilities are likely to be more profitable.

We argue that one reason why emerging economies borrow short term is that it is cheaper than borrowing long term. This is especially the case during crises, as in these episodes the relative cost of long-term borrowing increases. We construct a unique database of sovereign bond prices, returns, and issuances at different maturities for 11 emerging economies from 1990 to 2009 and present a set of new stylized facts. On average, these countries pay a higher risk premium on long-term than on short-term bonds. During crises, the difference between the two risk premia increases and issuance shifts towards shorter maturities. To illustrate our argument, we present a simple model in which the maturity structure is the outcome of a risk sharing problem between an emerging economy subject to rollover crises and risk averse international investors., World Bank (Research Support Budget), International Monetary Fund, Ministerio de Ciencia e Innovación, Spain, Barcelona GSE, Generalitat de Catalunya

Capital account liberalization, it is fair to say, remains one of the most controversial and least understood policies of our day. One reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows. Another is that empirical analysis has failed to yield conclusive results. The answer, another influential strand of thought contends, is that this efficient-markets paradigm is fundamentally misleading when applied to capital flows. Limits on capital movements are a distortion. It is an implication of the theory of the second best that removing one distortion need not be welfare enhancing when other distortions are present.

This article analyzes how external crises spread across countries. The authors analyze the behavior of four alternative crisis indicators in a sample of 20 countries during three well-known crises: the 1982 debt crisis, the 1994 Mexican crisis, and the 1997 Asian crisis. The objective is twofold: to revisit the transmission channels of crises, and to analyze whether capital controls, exchange rate flexibility, and debt maturity structure affect the extent of contagion. The results indicate that there is a strong neighborhood effect. Trade links and similarity in pre-crisis growth also explain (to a lesser extent) which countries suffer more contagion. Both debt composition and exchange rate flexibility to some extent limit contagion, whereas capital controls do not appear to curb it.

Is there a role for debt beyond curing overaccumulation of capital? Does dynamic efficiency and the infeasibility of debt Ponzi schemes eliminate any Pareto-improving role for a government in a competitive economy with complete markets? Is there an optimal maturity structure of public debt? Using a stochastic Diamond OLG model, we tackle these questions. We show that government debt can Pareto-improve upon market allocations through a mechanism that resembles a Ponzi scheme. But instead of rolling over safe debt, we can interpret our scheme as one that rolls over an insurance contract generation for generation. This kind of dynamic risk-sharing can provide insurance against macroeconomic risk. Using the widespread welfare concept of interim Pareto optimality, we ensure that all generations voluntarily participate in our insurance scheme. Yet, the scheme cannot be replicated on capital markets. Exploiting information from the term structure of interest rates, we derive testable conditions both for dynamic efficiency and for interim Pareto optimality in terms of interest rates. We provide evidence that real world economies, while being dynamically efficient, are likely not to be interim Pareto optimal. We conclude that there may be a welfareimproving role for a well-designed maturity structure of debt.

This paper examines how the ability to access long-term debt affects firm-level growth volatility. The analysis finds that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate the refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.