The EMU sovereign-debt crisis: fundamentals, expectations and contagion

In a research project conducted while visiting the DG-ECFIN in June 2010, we provided a detailed empirical investigation of the EMU sovereign-debt crisis up to February 2010.

Indexed versus nominal government debt under inflation and price-level targeting

This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT.

The Inflation Risk Premium on Government Debt in an Overlapping Generations Model

This paper presents a general equilibrium model in which nominal government debt pays an inflation risk premium. The model predicts that the inflation risk premium will be higher in economies which are exposed to unanticipated inflation through nominal asset holdings. In particular, the inflation risk premium is higher when government debt is primarily nominal, steady-state inflation is low, and when cash and nominal debt account for a large fraction of consumers' retirement portfolios. These channels do not appear to have been highlighted in previous models or tested empirically. Numerical results suggest that the inflation risk premium is comparable in magnitude to standard representative agent models. These findings have implications for management of government debt, since the inflation risk premium makes it more costly for governments to borrow using nominal rather than indexed debt. Simulations of an extended model with Epstein-Zin preferences suggest that increasing the share of indexed debt would enable governments to permanently lower taxes by an amount that is quantitatively non-trivial.

Dynamic Relational Contracts under Complete Information

This paper considers a long-term relationship between two agents who both undertake a costly action or investment that together produces a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. Two cases are considered: (i) where agents are risk neutral and are subject to limited liability constraints and (ii) where agents are risk averse, have quasi-linear preferences in consumption and actions but where limited liability constraints do not bind. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. In the risk-neutral case, there may be an initial phase in which one agent overinvests and the other underinvests. However, both actions and surplus converge monotonically to a stationary state in which there is no overinvestment and surplus is at its maximum subject to the constraints. In the risk-averse case, there is no overinvestment. For this case, we establish that dynamics may or may not be monotonic depending on whether or not it is possible to sustain a first-best allocation. If the first-best allocation is not sustainable, then there is a trade-off between risk sharing and surplus maximization. In general, surplus will not be at its constrained maximum even in the long run.

Delay and Haircuts in Sovereign Debt: Recovery and Sustainability

One of the striking aspects of recent sovereign debt restructurings is, conditional on default, delay length is positively correlated with the size of "haircut", which is size of creditor losses. In this paper, we develop an incomplete information model of debt restructuring where the prospect of uncertain economic recovery and the signalling about sustainability concerns together generate multi-period delay. The results from our analysis show that there is a correlation between delay length and size of haircut. Such results are supported by evidence. We show that Pareto ranking of equilibria, conditional on default, can be altered once we take into account the ex ante incentive of sovereign debtor. We use our results to evaluate proposals advocated to ensure orderly resolution of sovereign debt crises.

Memory in contracts: the experience of the EBRD (1991-2003)

The objective of this paper is to identify the role of memory as a screening device in repeated contracts with asymmetric information in financial intermediation. We use an original dataset from the European Bank for Reconstruction and Development. We propose a simple empirical method to capture the role of memory using the client's reputation. Our results unambiguously isolate the dominant effect of memory on the bank's lending decisions over market factors in the case of established clients.

Optimal coexistence of long-term and short-term contracts in labor Markets

We consider a market where firms hire workers to run their projects and such projects differ in profitability. At any period, each firm needs two workers to successfully run its project: a junior agent, with no specific skills, and a senior worker, whose effort is not verifiable. Senior workers differ in ability and their competence is revealed after they have worked as juniors in the market. We study the length of the contractual relationships between firms and workers in an environment where the matching between firms and workers is the result of market interaction. We show that, despite in a one-firm-one-worker set-up long-term contracts are the optimal choice for firms, market forces often induce firms to use short-term contracts. Unless the market only consists of firms with very profitable projects, firms operating highly profitable projects offer short-term contracts to ensure the service of high-ability workers and those with less lucrative projects also use short-term contracts to save on the junior workers' wage. Intermediate firms may (or may not) hire workers through long-term contracts.

Growth, selection and appropriate contracts

We study a dynamic model where growth requires both long-term investment and the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk of being replaced tend to choose a sub-optimally low level of long-term investment. This generates a trade-off between selection and investment that has implications for the choice of contractual relationships. Our analysis shows that rigid long-term contracts sacrificing managerial selection may be optimal at early stages of economic development and when access to information is limited. As the economy grows, however, knowledge accumulation increases the return to talent and makes it optimal to adopt flexible contractual relationships, where managerial selection is implemented even at the cost of lower investment. Better institutions, in the form of a richer contracting environment and less severe informational frictions, speed up the transition to short-term relationships.

Decentralization of contracts with interim sidecontracting

This paper gives a new explanation for the phenomena of subcontracting. A model in which a principal contracts two agents who work in a sequence on a project, have soft information and can collude is considered. Side-contracts between agents can be signed at any stage of the game. Due to limited liability and moral hazard agents obtain a rent. The principal’s problem is to find the preferable contracting structure. It is shown that in this setting a decentralized contracting structure can be superior to a centralized structure for the principal. The paper derives the conditions under which this holds. Journal of Economic Literature Classification Numbers: D23, D82, L14, L22. Keywords: Contract delegation, Collusion, Interim side-contracting, Moral hazard.

Women, Debt & Health; a Joint report of The Women’s Health Council and MABS

Women, Debt & Health; a Joint report of The Women’s Health Council and MABS The main aims of the â?~Women, Debt and Healthâ?T project were to:- explore whether women attending the MABS service commonly discuss health during their money advice and budgeting consultations;- investigate whether women attending MABS identifi ed links between their debt or financial difficulties and their health; and- document the types of health issues experienced by MABS clients.- A secondary aim of the research was to explore the need for, and nature of, further research in this area. Click here to download PDF 1.1mb

Iowa Department of Transportation Office of Contracts Letting Summary, July 1, 2002 - June 30, 2003

Summary of contracts let by Iowa DOT Office of Contracts in 12 regular and three emergency/special lettings during FY 2003 for construction and maintenance work. It also contains a comparison of quantities and unit contract prices for various items of highway construction work for projects let in fiscal years 2000, 2001, 2002 and 2003.

A Review of Service Contracts for Selected State Agencies

State Agency Audit Report

Department of Administrative Services, Information Technology Enterprise, A Review of Selected Service Contracts, April 1, 1998 - June 30, 2003

Other Audit Reports - Special Report

Iowa Department of Transportation Office of Contracts Letting Summary - July 1, 2003, thru June 30, 2004

A summary of the 12 regularly scheduled lettings and three emergency/special lettings held by the Iowa Department of Transportation for construction and maintenance work during the period July 1, 2003, through June 30, 2004.