Working Paper: CEPR ID: DP2520
Authors: Olivier Jeanne
Abstract: The paper starts from the premise that the debate on the ?new architecture? of the international financial system should be based on a theory that endogenizes the structure of countries' external liabilities. I present a model in which the maturity of a country's external sovereign debt is the solution to an incentives problem, which may lead to reliance on short-term debt and vulnerability to runs. I study, in the context of this model, the welfare effects of an international lender of last resort, measures aimed at coordinating creditors in crises, and a tax on short-term capital flows. These measures may increase or decrease global welfare, and always leave it strictly below the first-best level.
Keywords: capital controls; debt maturity; international debt; lending in last resort; liquidity crises
JEL Codes: F32; F33; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incentives problem (M52) | maturity of a country's external sovereign debt (F34) |
| maturity of a country's external sovereign debt (F34) | preference for short-term debt (G19) |
| preference for short-term debt (G19) | vulnerability to self-fulfilling runs by creditors (E44) |
| short-term debt (H63) | government fiscal policies (E62) |
| short-term debt (H63) | liquidity crises (G01) |
| international lender of last resort (F34) | welfare of countries during crises (H84) |
| tax on short-term capital flows (F38) | welfare (I38) |