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The effect of payments standstills on yields and the maturity structure of international debt

  • Benjamin Martin
  • Adrian Penalver

Payments standstills have been suggested as a tool for the resolution of financial crises in emerging markets economies. A simple model is developed here to examine the implications of standstills for yields and the maturity structure of debt. An emerging market country chooses to sell short and long-term debt to risk-neutral international investors. The key assumptions are that the level of short-term debt increases the probability of crisis, that crises have costs that spill over into the next period, and that the orderly resolution of financial crises will reduce the cost of crises. A standstill is depicted as an orderly rollover of short-term debt. Standstills have the benefit of reducing the proportion of short-term debt and so lower the probability of crisis. This comes at the cost of generally lower expected output.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp184.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 184.

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Date of creation: Apr 2003
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Handle: RePEc:boe:boeewp:184
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  1. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  2. Buiter, Willem H. & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers.
  3. Hyun Song Shin & Prasanna Gai & Simon Hayes, 2001. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," FMG Discussion Papers dp390, Financial Markets Group.
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  6. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, vol. 110(460), pages 335-62, January.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  8. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," FRB Atlanta Working Paper 98-10, Federal Reserve Bank of Atlanta.
  9. Willem H. Buiter & Anne Sibert, 1999. "UDROP: a small contribution to the international financial architecture," LSE Research Online Documents on Economics 20224, London School of Economics and Political Science, LSE Library.
  10. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  11. Jeffrey A. Frankel & Nouriel Roubini, 2001. "The Role of Industrial Country Policies in Emerging Market Crises," NBER Working Papers 8634, National Bureau of Economic Research, Inc.
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