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This paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (i) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (ii) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like in Chile and Peru, gives more room for accommodating terms-of-trade shocks.

Exports and Imports --- Macroeconomics --- Information Management --- Fiscal Policy --- Empirical Studies of Trade --- National Government Expenditures and Related Policies: General --- Economic Development: Agriculture --- Natural Resources --- Energy --- Environment --- Other Primary Products --- Commodity Markets --- Current Account Adjustment --- Short-term Capital Movements --- Technological Change: Choices and Consequences --- Diffusion Processes --- International economics --- Knowledge management --- Commodity price shocks --- Current account --- Technology transfer --- Current account deficits --- Commodity prices --- Prices --- Balance of payments --- Technology --- Chile

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We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.

Macroeconomics --- Economics: General --- International Economics --- Investments: Bonds --- Exports and Imports --- Economic Theory --- Public Finance --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- International Lending and Debt Problems --- General Financial Markets: General (includes Measurement and Data) --- Debt --- Debt Management --- Sovereign Debt --- Economic Development: Financial Markets --- Saving and Capital Investment --- Corporate Finance and Governance --- Expectations --- Speculations --- Price Level --- Inflation --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Investment & securities --- International economics --- Economic theory & philosophy --- Public finance & taxation --- Financial crises --- Economic sectors --- Bonds --- Financial institutions --- Debt default --- External debt --- Rational expectations --- Economic theory --- Public debt --- Asset prices --- Prices --- Currency crises --- Informal sector --- Economics --- Debts, External --- Debts, Public --- Argentina

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Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Debts, Public --- Aggregate Factor Income Distribution --- Capital market --- Debt default --- Debt Management --- Debt --- Debts, External --- Economic & financial crises & disasters --- Exports and Imports --- External debt --- Finance --- Finance: General --- Financial Crises --- Financial crises --- Financial markets --- Financial Risk Management --- General Financial Markets: General (includes Measurement and Data) --- Income --- International economics --- International Lending and Debt Problems --- Macroeconomics --- National accounts --- Open Economy Macroeconomics --- Public debt --- Public finance & taxation --- Public Finance --- Securities markets --- Sovereign Debt --- Greece

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We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.

Argentina --- Macroeconomics --- Economics: General --- International Economics --- Investments: Bonds --- Exports and Imports --- Economic Theory --- Public Finance --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- International Lending and Debt Problems --- General Financial Markets: General (includes Measurement and Data) --- Debt --- Debt Management --- Sovereign Debt --- Economic Development: Financial Markets --- Saving and Capital Investment --- Corporate Finance and Governance --- Expectations --- Speculations --- Price Level --- Inflation --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Investment & securities --- International economics --- Economic theory & philosophy --- Public finance & taxation --- Financial crises --- Economic sectors --- Bonds --- Financial institutions --- Debt default --- External debt --- Rational expectations --- Economic theory --- Public debt --- Asset prices --- Prices --- Currency crises --- Informal sector --- Economics --- Debts, External --- Debts, Public

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We study gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit results in higher welfare across economies in the Union.

Macroeconomics --- Economics: General --- Financial Risk Management --- International Lending and Debt Problems --- Open Economy Macroeconomics --- Fiscal Policy --- Debt --- Debt Management --- Sovereign Debt --- Price Level --- Inflation --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Fiscal rules --- Fiscal policy --- Debt limits --- Asset and liability management --- Asset prices --- Prices --- Currency crises --- Informal sector --- Economics