Journal of Banking and Financial Economics

JBFE No 2/2015

Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

Carmen M. Reinhart, Kenneth S. Rogoff


Even after one of the most severe multi-year crises on record in the advanced economies, the
received wisdom in policy circles clings to the notion that high-income countries are completely
different from their emerging market counterparts. The current phase of the official policy
approach is predicated on the assumption that debt sustainability can be achieved through a mix
of austerity, forbearance and growth. The claim is that advanced countries do not need to resort
to the standard toolkit of emerging markets, including debt restructurings and conversions, higher
inflation, capital controls and other forms of financial repression. As we document, this claim is
at odds with the historical track record of most advanced economies, where debt restructuring or
conversions, financial repression, and a tolerance for higher inflation, or a combination of these
were an integral part of the resolution of significant past debt overhangs.


JEL classification: E6, E44, F3, F34, G1, H6, N10
Keywords: Financial crises, sovereign debt crises, deleveraging, credit cycles, financial repression,
debt restructuring, debt forgiveness, capital controls, austerity

DOI: 10.7172/2353-6845.jbfe.2015.2.1

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Asset choice in British central banking history, the myth of the safe asset, and bank regulation
William A. Allen




The paper describes the use of commercial bills in Bank of England open-market operations
from the earliest days of central banking in the 19th century, when, it is suggested, the Bank of
England’s main objective was what would now be called macro-prudential, until the 1980s, when
commercial bill purchases were an essential feature of contemporary anti-inflationary policy. It
explores the relationship between government securities, central bank assets and bank liquidity
regulation, exposes as a myth the belief that government securities are perfectly safe assets,
and challenges the idea that central banks should confine their asset holdings to government
securities. In addition, the paper argues that by making more active use of the policy instrument
of central bank asset choice, by acknowledging the connection between liquidity regulation
and open-market operations, and by making certain changes to the Basel 3 Liquidity Coverage
Ratio regulations, central banks could both better achieve some of their macro-prudential policy
objectives and stimulate high-quality bank lending.


JEL classification: E52, E58
Keywords: commercial bills, bills of exchange, Bank of England, eligibility, bank liquidity,
Basel 3, Liquidity Coverage Ratio, overfunding, monetary targets, macroprudential policy,
risk‑free asset, government securities

DOI: 10.7172/2353-6845.jbfe.2015.2.2

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The Day After Tomorrow: Designing an Optimal Fiscal Strategy for Libya
Carlos Caceres, Serhan Cevik, Ricardo Fenochietto, Borja Gracia


Libya is highly dependent on exhaustible and volatile hydrocarbon resources, which constitute
the bulk of government revenues. Although resource wealth provides the means to promote
socio-economic development, procyclical fiscal policies threaten macroeconomic stability as
well as fiscal sustainability and intergenerational equity. This paper provides an assessment of the
cyclically adjusted fiscal stance, analyzes fiscal sustainability according the permanent income
framework, and simulates various fiscal policy rules with the objective of developing a rulebased
fiscal strategy that would delink the economy from oil price fluctuations, improve the
management of resource wealth, and safeguard macroeconomic stability. The empirical results
suggest that an “enhanced” structural fiscal balance rule would provide the strongest anchor for
policymaking, accommodating for output and/or commodity price shocks, though at the cost of
relative complexity.


JEL classification: E32, E62, H11, H62, O13
Keywords: Fiscal policy, fiscal sustainability, fiscal rules, natural resources, public financial

DOI: 10.7172/2353-6845.jbfe.2015.2.3

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Risks and Opportunities of Participation in Global Value Chains
Gary Gereffi, Xubei Luo


Risk is inherent to the pursuit of opportunity. This paper draws on the recent literature and looks
at the risks and opportunities firms and their workers face in the global value chains. First, it
examines the sharing mechanisms that firms provide from the national and global perspectives;
second, it takes a closer look at the new opportunities and challenges for firms and individuals
in the global arena; third, it discusses the role of economic upgrading and social upgrading; and
finally it sheds light on how the government can help people manage risks and reap the benefits of
participation in global value chains.


JEL classification:F63, F68, L22, L23
Keywords: Risk; global value chains; economic upgrading; social upgrading; global recession

DOI: 10.7172/2353-6845.jbfe.2015.2.4

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Is Uruguay More Resilient This Time? Distributional Impacts of a Crisis Similiar to the 2001-02 Argentine Crisis
Oscar Barriga Cabanillas, María Ana Lugo, Hannah Nielsen, Carlos Rodríguez-Castelán, María Pía Zanetti


The 2001–02 Argentine crisis had a profound impact on Uruguay’s economy. Uruguay’s gross domestic

product shrank by 17.5 percent, and the proportion of people living below the poverty line doubled in only

two years. It took almost 10 years for the poverty rate to recover to its precrisis level. This paper uses

a macro-micro simulation technique to simulate the impact of a similar crisis on the current Uruguayan economy.

The simulation exercise suggests that Uruguay would now be in a better place to weather such a severe crisis.

The impact on poverty would be considerably more moderate; inequality would not change significantly;

and household incomes would be 8 percent lower than in the absence of a crisis (almost 9 percent lower among

households in the bottom 40 percent of the income distribution). The paper also explores the changes in social

welfare policy that took place in the last decade that are protecting vulnerable groups from new macroeconomic

shocks. We find that, despite the new policies, young individuals, woman-headed households, residents

of Montevideo, and people who have not completed secondary education are more vulnerable to falling

into poverty were the crisis to strike.


JEL classification: E32, E37, F6, I3, O54
Keywords: Business cycles, microsimulations, distributional analysis, Uruguay

DOI: 10.7172/2353-6845.jbfe.2015.2.5

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Trade Policy Barriers: An Obstacle to Export Diversification in Eurasia
Ana Paula Cusolito, Claire H. Hollweg



Despite trade liberalization efforts made by Eurasian countries, the export structure of
the region shows significant levels of concentration across export destinations. To shed light
on this observation, this research analyzes trade policy barriers in Eurasia, East Asia and
the Pacific, and the European Union. Using the most recent data from sources including the
World Trade Organization, the United Nations, and the World Bank – including the Overall
Trade Restrictiveness Indices, the Services Trade Restrictions Database, and the Temporary
Trade Barriers Database – the role of tariffs, non-tariff measures, temporary trade barriers, trade
agreements, and trade barriers in services are explored to explain the lack of diversification by
destination. Several conclusions can be drawn from the analysis. First, China, Korea, and Japan, as
well as the European Union, impose high levels of protection on products of animal origin, which
may explain the lack of Eurasian export diversification toward the East Asia and the Pacific and
the European Union regions. It also highlights the potential benefits of diversifying the structure
of production in Eurasia toward more sophisticated and technologically intensive goods. Second,
the East Asia and the Pacific region (especially China) appears to be more protectionist than the
European Union, suggesting a greater challenge for Eurasian countries in diversifying exports to
the destination. And third, few or no regional trade agreements exist between Eurasian countries
and countries in the European Union or East Asia and the Pacific.


JEL classification: F13; F15
Keywords: Export diversification, trade policy barriers, tariffs, non-tariff measures, preferential
trade agreements

DOI: 10.7172/2353-6845.jbfe.2015.2.6

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