Earnings Management and Investor Protection: An International Comparison

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Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

Default risk and income fluctuations in emerging economies

Recent sovereign defaults in emerging countries are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output, consumption, and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default occurs in equilibrium because asset markets are incomplete. The model predicts that default incentives and interest rates are
higher in recessions, as observed in the data. The reason is that in a recession, a risk averse borrower finds it more costly to repay non-contingent debt and is more likely to default. In a quantitative exercise the model matches various features of the business cycle in Argentina
such as: high volatility of interest rates, higher volatility of consumption relative to output, a negative correlation of interest rates and output and a negative correlation of the trade balance and output. The model can also predict the recent default episode in Argentina.

/pdf/default-risk-and-income-fluctuations-in-emerging-economies-3uwetnmpe6.pdf

Default Risk and Income Fluctuations in Emerging Economies

Aggregate and sectoral comovement are central features of business cycles, so the ability to generate comovement is a natural litmus test for macroeconomic models. But it is a test that most models fail. We propose a unified model that generates aggregate and sectoral comovement in response to contemporaneous and news shocks about fundamentals. The fundamentals that we consider are aggregate and sectoral total factor productivity shocks as well as investment specific technical change. The model has three key elements: variable capital utilization, adjustment costs to investment, and preferences that allow us to parameterize the strength of short-run wealth effects on the labor supply. (JEL

/pdf/can-news-about-the-future-drive-the-business-cycle-b482sd6shw.pdf

Can news about the future drive the business cycle

/pdf/quantitative-properties-of-sovereign-default-models-gxcydxkgjt.pdf

Quantitative properties of sovereign default models

More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market Further, because the stochastic discount factor makes capital investment more procyclical, financial constraints are more binding in economic booms These insights arise from two dynamic models In Model 1, firms face dividend nonnegativity constraints without any access to external funds In Model 2, firms can retain earnings, raise debt and equity, but face collateral constraints on debt capacity Despite their diverse structures, the two models share largely similar predictions

Financially Constrained Stock Returns

Understanding Sovereign Default

Sovereign Default Risk and Implications for Fiscal Policy

We study the relationship between the strength of the bank credit channel (BCC) of monetary policy and real GDP growth in the United States using quarterly commercial bank level data between 1986 and 2008. We find that the BCC was significantly stronger during periods of low economic growth. Monetary policy is more effective through this channel in spurring economic activity during periods of low growth, rather than in cooling the economy when growth is high. Furthermore, we find that the BCC operated through a broader range of loan categories and banks than previously documented, underscoring this channel?s economic relevance.

/pdf/how-does-the-strength-of-monetary-policy-transmission-depend-4fw3701507.pdf

Horacio Sapriza

Papers

Quantitative properties of sovereign default models

Financially Constrained Stock Returns

Understanding Sovereign Default

Sovereign Default Risk and Implications for Fiscal Policy

How does the strength of monetary policy transmission depend on real economic activity