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This paper proposes a new framework for the analysis of public sector debt sustainability. The framework uses concepts and methods from modern practice of contingent claims to develop a quantitative risk-based model of sovereign credit risk. The motivation in developing this framework is to provide a clear and workable complement to traditional debt sustainability analysis which-although it has many useful applications-suffers from the inability to measure risk exposures, default probabilities and credit spreads. Importantly, this new framework can be adapted for policy analysis, including debt and reserve management.

Exports and Imports --- Public Finance --- International Lending and Debt Problems --- Debt --- Debt Management --- Sovereign Debt --- International economics --- Public finance & taxation --- Local currency debt --- Foreign currency debt --- Debt sustainability --- Debt sustainability analysis --- Public debt --- Debts, External --- Debts, Public --- United States

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A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.

Foreign exchange rates --- Debts, External --- Imports --- International trade --- Debts, Foreign --- Debts, International --- External debts --- Foreign debts --- International debts --- Debt --- International finance --- Investments, Foreign --- Econometric models. --- Exports and Imports --- Foreign Exchange --- International Lending and Debt Problems --- Trade: General --- International economics --- Currency --- Foreign exchange --- Foreign currency debt --- Exchange rate arrangements --- External debt --- Exchange rate flexibility

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Growth-indexed bonds have been suggested as a way of reducing the procyclicality of emerging-market countries' fiscal policies and the likelihood of costly debt crises. Investor attitude surveys suggest that pricing difficulties are seen as a considerable obstacle. In an effort to reduce such concerns, this article presents a simple way of pricing growth-indexed bonds. As a pleasant by-product, the analysis tracks the quantitative implications of an increase in the share of growth-indexed bonds in total debt, measuring the ensuing decline in the probability of default and the reduction in the spreads at which standard bonds can be issued.

Bond market. --- Bonds -- Prices. --- Electronic books. -- local. --- Government securities -- Developing countries. --- Inflation-indexed bonds -- Developing countries. --- Exports and Imports --- Finance: General --- Investments: Bonds --- Macroeconomics --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Inflation --- Deflation --- International Lending and Debt Problems --- Investment & securities --- Finance --- International economics --- Bonds --- Emerging and frontier financial markets --- Inflation-indexed bonds --- Asset prices --- Foreign currency debt --- Financial services industry --- Prices --- Debts, External --- United States --- Government securities --- Prices.

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This Selected Issues paper analyzes the current account performance of Denmark in 1993–98. The paper presents a brief review of structural features of the external current account. It looks at the decline in export market share and concludes that it reflects primarily cyclical factors and the unwinding of an unsustainable export market gain immediately after the German unification. The paper also examines implications for fiscal policy of Denmark’s decision to remain for the time being outside the European Monetary Union.

Exports and Imports --- Foreign Exchange --- Inflation --- Investments: General --- Public Finance --- International Lending and Debt Problems --- Price Level --- Deflation --- Trade: General --- Debt --- Debt Management --- Sovereign Debt --- Current Account Adjustment --- Short-term Capital Movements --- International economics --- Macroeconomics --- Public finance & taxation --- Currency --- Foreign exchange --- Econometrics & economic statistics --- External debt --- Current account --- Exports --- Foreign currency debt --- Prices --- Balance of payments --- International trade --- Return on investment --- National accounts --- Debts, External --- Debts, Public --- Denmark

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Building on the vast literature, this paper focuses on the role of the structure of the international investment position (IIP) in affecting countries’ external vulnerabilities. Using a sample of 73 advanced and emerging economies and new database on the IIP’s currency composition, we find that the size and structure of external liabilities and assets, especially with regards to currency denomination, matter in understanding balance-of-payments pressures. Specifically, and beyond the standard macroeconomic factors highlighted in other studies, higher levels of gross external debt increase the likelihood of an external crisis, while higher levels of foreign-currency-denominated external debt increase the likelihood of sudden stops. Foreign reserve assets play a mitigating role, although with diminishing returns, and the combination of flow and stock imbalances amplifies external risks, especially during periods of heightened global risk aversion. The results are especially strong for emerging economies, where the impact of flow and stock imbalances and foreign currency mismatches are larger and more robust across specifications.

Banks and Banking --- Exports and Imports --- Financial Risk Management --- Financial Markets and the Macroeconomy --- Current Account Adjustment --- Short-term Capital Movements --- International Lending and Debt Problems --- International Financial Markets --- Debt --- Debt Management --- Sovereign Debt --- International Investment --- Long-term Capital Movements --- Financial Crises --- Monetary Policy --- International economics --- Economic & financial crises & disasters --- Banking --- External debt --- Sudden stops --- Foreign currency debt --- Financial crises --- International reserves --- Debts, External --- Capital movements --- Foreign exchange reserves --- Spain