During emerging market crises, government interest rate spreads rise, the debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. This paper studies the maturity composition of debt in a dynamic model with endogenous default, in which the price of debt compensates for the risk-adjusted losses from default. Short-term debt is better at inducing repayment because it does not require savings in the near future for repaying in the far future. Hence, short-term debt can raise more resources than long-term debt. However, issuing long-term debt provides a hedge against the need to roll-over shortterm debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.
During emerging market crises, government interest rate spreads rise, the debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. This paper studies the maturity composition of debt in a dynamic model with endogenous default, in which the price of debt compensates for the risk-adjusted losses from default. Short-term debt is better at inducing repayment because it does not require savings in the near future for repaying in the far future. Hence, short-term debt can raise more resources than long-term debt. However, issuing long-term debt provides a hedge against the need to roll-over shortterm debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.
We explore the impact of vertical specialization -trade in goods across multiple stages of production -on the relationship between trade and business cycle synchronization across countries. We develop an international business cycle model in which the degree of vertical specialization varies with trade barriers. With perfect competition, we show analytically that fluctuations in measured total factor productivity are not linked across countries through trade. In numerical simulations, we find little dependence of business cycle synchronization on trade intensity. An extension of the model to allow for imperfect competition has the potential to resolve these shortcomings.
We explore the impact of vertical specialization -trade in goods across multiple stages of production -on the relationship between trade and business cycle synchronization across countries. We develop an international business cycle model in which the degree of vertical specialization varies with trade barriers. With perfect competition, we show analytically that fluctuations in measured total factor productivity are not linked across countries through trade. In numerical simulations, we find little dependence of business cycle synchronization on trade intensity. An extension of the model to allow for imperfect competition has the potential to resolve these shortcomings.
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