The Global Crisis and Equity Market Contagion

We analyze the transmission of the 2007 to 2009 financial crisis to 415 country‐industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the United States and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries’ economic fundamentals. This confirms the “wake‐up call” hypothesis, with markets focusing more on country‐specific characteristics during the crisis.     

Growth and Public Debt: What Are the Relevant Trade‐Offs?

The interplay between growth and public debt is addressed considering a Barro‐type (1990) endogenous growth model where public spendings are financed through taxes on income and public debt. The government has a target level of public debt relative to GDP, and the long‐run debt‐to‐GDP ratio is used as a policy parameter. We show that when debt is a large enough proportion of GDP, two distinct balanced‐growth paths (BGPs) may coexist, one being indeterminate. We exhibit two types of important trade‐offs associated with self‐fulfilling expectations. First, we show that the lowest BGP is always decreasing with respect to the debt‐to‐GDP ratio while the highest one is increasing. Second, we show that the highest BGP, which provides the highest welfare, is always locally indeterminate while the lowest is always locally determinate. Therefore, local and global indeterminacy may arise and self‐fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth, welfare, and macroeconomic fluctuations. Finally, a simple calibration exercise allows to provide an understanding of the recent experiences of many OECD countries.     

The Salient Issue of Issue Salience

This paper proposes a model where the set of issues that are decisive in an election (i.e., the set of salient issues) is endogenous. The model takes into account a key feature of the policy-making process, namely, that the decision-maker faces time and budget constraints that prevent him from addressing all of the issues that are on the agenda. We show that this feature creates a rationale for a policy-motivated decision-maker to manipulate his policy choice in order to influence which issues will be salient in the next election. We identify three motivations for the decision-maker to manipulate his policy choice for salience purposes. One is to make salient an issue on which he has an electoral advantage. A second motivation is to defuse the salience of an issue on which he is electorally weak, which is accomplished by either implicitly committing to a policy outcome or triggering a change of salient issue for the challenger. A third motivation is to induce the opposition party to nominate a candidate who, if elected, will implement a policy that the incumbent decision maker finds more palatable.