The aftermart of debt restructuring and default.

• Position: Conferences

An NBER Inter-American Seminar on Economics, focusing on the aftermath of debt restructuring and default, took place in Cambridge on July 12. Research Associates Sebastian Edwards, University of California, Los Angeles, and Carmen M. Reinhart, University of Maryland, organized this program:

Mark A. Aguiar and Gita Gopinath, University of Chicago, "Emerging Market Business Cycles: The Cycle is the Trend"

Discussant: Pierre-Olivier Gourinchas, NBER and University of California, Berkeley

Alejandro Neut, BBVA in Madrid, and Andres Velasco, NBER and Harvard University, "Tough Policies, Incredible Policies?"

Discussant: Carlos Zarazaga, Federal Reserve Bank of Dallas

Juan Carlos Berganza and Alicia Garcia Herrero, Banco de Espana, "What Makes Balance Sheet Effects Detrimental for the Country Risk Premium?"

Discussant: Sergio Schmukler, The World Bank

Assaf Razin, NBER and Tel Aviv University, and Yona Rubinstein, Tel Aviv University, "Growth Effects of Exchange Rate Regimes and Capital Account Liberalization in the Presence of Crises: A Nuanced View"

Discussant: Menzie D. Chinn, NBER and University of Wisconsin

Emanuel Kohlscheen, University of Warwick, "Sovereign Risk: Constitutions Rule"

Discussant: Michael Kumhof, International Monetary Fund

Federico Weinschelbaum, Universidad de San Andres, and Jose Wynne, Duke University, "Renegotiation, Collective Action Clauses, and Sovereign Debt Markets"

Discussant: Eduardo Levy-Yeyati, Universidad Torcuato di Tella

Jacques Miniane, International Monetary Fund, and John H. Rogers, Federal Reserve Board, "Capital Controls and the International Transmission of U.S. Money Shocks"

Discussant: Haft Edison, International Monetary Fund

Gopinath and Aguiar document and contrast features of the business cycle for emerging markets and developed, small open economies. In emerging markets, current accounts are more strongly countercyclical and consumption is more volatile relative to income. A standard, dynamic, stochastic, small open economy model can account both qualitatively and quantitatively for the behavior of both types of markets after the decomposition of underlying productivity shocks into permanent and transitory shocks is modeled appropriately. When the parameters of the income process are estimated structurally using GMM for each type of economy, the observed predominance of shocks to trend growth relative to transitory shocks for emerging markets, and the reverse for developed markets, explains differences in key features of their business cycles. In addition, using a VAR methodology to identify permanent shocks, the authors find that shocks to trend generate a preponderance of income variance at business cycle frequencies in emerging markets. This further supports the notion that the "cycle is the trend" for these economies.

Neut and Velasco revisit the question of what determines the credibility of macroeconomic policies--in this case, of promises to repay public debt. The literature has focused on governments' strategic decisions to default (or erode the value of outstanding debt via inflation/devaluation). It also has focused on increasing policymakers' utility costs as a way to deter strategic misbehavior. By contrast, we build a model in which default or inflation can occur deliberately (for strategic reasons) or unavoidably (shocks leave no other option). In addition, when it does occur, default or inflation entail pecuniary costs, not just utility costs for the policymaker. In the model with these two features, much conventional wisdom on the determinants of credibility need no longer hold. Tough policies, such as appointing a conservative policymaker, indexing public debt, or denominating public debt in foreign currency may reduce, not increase, the credibility of vows to repay debt in full. For some parameter values, these tough policies also may reduce welfare.

Berganza and Herrero build upon the empirical literature on the macro-economic impact of real exchange rate depreciations for a sample of 27 emerging economies. They find that real exchange rate depreciations tend to increase a country's risk premium. This effect is neither linear nor symmetric: large real exchange depreciations are much more detrimental and real appreciations do not seem to reduce the risk premium. The authors also show that the main channels for the real exchange rate to affect country risk are external and domestic balance sheet effects, stemming from the sudden increase in the stock of external or domestic dollar-denominated debt, respectively. This is particularly the case for the countries with the largest financial imperfections. Competitiveness is not important enough to outweigh this negative effect. Finally, fixed exchange rate regimes tend to amplify balance sheet effects, beyond the extent of real depreciation. The data indicate that it could be because of a larger...