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Macro Seminar Paper

 "Income Growth and Corruption Incentives with Failing Institutions"
David de la Croix (Université Catholique de Louvain)

Thursday, Dec 6, from 12:30 - 2:00 in room MC8-100

The paper is jointly written with Clara Delavallade(Université Paris 1, CNRS). The authors bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. The authors concentrate on two exogenous institutional parameters: the "technology of corruption" is the ease with which rent-seekers can capture a proportion of public spending. The "concentration of political power" is the extent to which rent-seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of institutional quality on growth should be weaker in developed countries than in developing countries. The authors estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by their proxies for legal and political institutions in developing countries than in developed ones.

 "Restructuring the Sovereign Debt Restructuring Mechanism"
Mark Wright (UCLA)

Thursday, Nov 29, from 12:30 - 2:00 in room MC7-100

The paper is jointly written with Rohan Pitchford (University of Sydney). Sovereign defaults are time consuming and costly to resolve. But these costs also improve borrowing incentives ex-ante. What is the optimal tradeoff between efficient borrowing ex-ante and the costs of default ex-post? What policy reforms, from collective action clauses to an international bankruptcy court, would attain this optimal tradeoff? Towards an answer to these questions, this paper presents an incomplete markets model of sovereign borrowing default coupled with an explicit model of the sovereign debt restructuring process in which delay arises due to both creditor holdout and free-riding on negotiation effort. The authors characterize the ex-ante optimal amount of delay, and explore numerically the effects of various policy options on the amount of delay in renegotiations, and on the effciency of capital flows.

"Excessive Dollar Borrowing in Emerging Markets: Balance Sheet Effects and Macroeconomic Externalities"
Anton Korinek (UMD)

Thursday, Oct 25, 12:30 - 2:00, room MC8-100

This paper shows that private borrowers in emerging markets take on excessive dollar debt as opposed to local currency debt because they fail to internalize that dollar debts expose their economies to greater risk of financial crises. In emerging markets, negative shocks typically depreciate the exchange rate. The depreciation inflates the local currency value of dollar debts and reduces the net worth and working capital of dollar borrowing firms. When credit constraints are binding, lower working capital leads to a decline in each firm's output. However, in aggregate, lower output depreciates the exchange rate further; a cycle of rising debt values, falling output, and depreciating exchange rates, which is also known as "debt deflation process," is triggered. Small borrowers take the distribution of exchange rates as given, i.e. they do not internalize that borrowing in dollars leads to tighter credit constraints for everybody in the economy in case of negative shocks. Therefore they undervalue the social costs of dollar debt and take on too much of it. The authors discuss a number of policy measures and advocate an unremunerated reserve requirement on dollar debt to correct the distortion.

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