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International Financial Integration, Sovereignty and Constraints on Macroeconomic Policies

  • Kletzer, Kenneth

This paper considers the consequences of international financial market integration for national fiscal and monetary policies that derive from the absence of an international sovereign authority to define and enforce contractual obligations across borders. The sovereign immunity of national governments serves as a fundamental constraint on international finance and is used to derive intertemporal budget constraints for sovereign nations and their governments. It is shown that the appropriate debt limit for a country allows for state-contingent repayment. With non-contingent debt instruments, debt renegotiation occurs in equilibrium with positive probability. A model of tax smoothing is adopted to show how information imperfections lead to conventional bond contracts that are renegotiated when a critical level of indebtedness is reached. Renegotiation is interpreted in terms of nominal and real denominated bonds drawing implications of the intertemporal borrowing constraint for monetary policies, the accumulation of reserve assets and current account sustainability.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt8n31g89q.

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Date of creation: 01 Aug 2005
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Handle: RePEc:cdl:ucscec:qt8n31g89q
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  2. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-75, December.
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  8. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
  9. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, vol. 84(1), pages 309-19, March.
  10. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  11. Robert J. Barro, 2002. "Optimal Management of Indexed and Nominal Debt," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 5, pages 135-150 Central Bank of Chile.
  12. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  13. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
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  15. Kenneth Kletzer, 2005. "Sovereign Debt, Volatility and Insurance," Working Papers Central Bank of Chile 330, Central Bank of Chile.
  16. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
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  19. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  20. Bohn, Henning, 1990. "Tax Smoothing with Financial Instruments," American Economic Review, American Economic Association, vol. 80(5), pages 1217-30, December.
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  24. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring; Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
  25. Robert J. Barro, 1999. "Notes on Optimal Debt Management," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 281-289, November.
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