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We find strong evidence of country interdependence in the pricing of default risk, which suggests that a crisis can easily propagate from countries with weak fiscal fundamentals to other fiscally sounder member States. Interest rate interdependence differs between countries with high interest rates -high yielders- and countries with low interest rates -low yielders-. The former countries are linked through global spreads; i.e. they are exposed to the interest rate spreads (over Germany) of other troubled countries to a degree which increases with fiscal proximity. Low yielders with sounder fiscal fundamentals are partially immune from the high interest rates of fiscally weak member States but are still exposed to the risk of a euro break-up that is priced in Quanto CDS. This 'euro risk' factor is a main driver of the interest rate spreads of low yielders until August 2012. More importantly, our case study of Italy shows that the impact of the global spread variable is dominated by changes in market sentiment, a sign that the Italian 2011-2012 crisis had the characteristics of a debt run more than a crisis of fundamentals. This evidence suggests that Eurobonds would be justified as an instrument for crisis prevention in the absence of a 'lender of last resort'. With the announcement of OMTs, the ECB seems to have taken such role upon itself, mainly as a response to the risk of a euro break-up. We show that OMTs led to a significant fall in the impact effect of the global spread variable in the Italian case. The ECB's ability to buy member States' bonds reduces the risk of a self-fulfilling debt run but also deprives Eurobonds of their role in crisis prevention. Proposals to introduce Eurobonds to finance investment projects and expenditures related to the security and refugee crisis appear more realistic.

We examine the allocation of net loans, net transfers and grants to IDA countries over the period 1982-2008 focusing on the role of debt and debt sustainability in the decisions of multilateral and bilateral donors. We find no evidence of defensive lending but strong evidence of defensive granting. A significant negative reaction of net loans to the debt ratio indeed characterizes the decisions of both multilateral and bilateral creditors. The impact of lower loans on the budget of debtor countries is however accommodated through higher grants, in addition to debt relief. These findings are consistent with a substitution of grants for loans and with the new approach to debt sustainability but question the efficiency and selectivity of foreign aid

We study the potential for introducing indexation on loans provided by multilateral lenders to LICs, and thus whether a reform of their lending policy is feasible and economically justified. To this end, we provide new evidence for a group of 40 IDA countries over the 1990-2010 period for three types of debt: i) foreign currency loans indexed to real GDP; ii) foreign currency loans indexed to the dollar value of exports; iii) inflation-indexed loans denominated in local currency. We find that both GDP indexation and domestic currency lending are feasible policies, since individual country risk could be easily diversified in a portfolio of loans to IDA countries. The estimation of CAPM beta coefficients suggests that, while the risk of export-indexed loans is difficult to hedge, loans indexed to GDP or denominated in local currencies could be introduced at current interest rates; their risk premium is no greater than one percent. The insurance that indexed debt might offer to LICs against macroeconomic shocks threatening their debt sustainability depends on the conditional covariances of GDP growth, real exchange-rate depreciation and net exports that we estimate as the covariances of the forecast errors obtained from a VAR model. The analysis shows that GDP-indexed or export-indexed loans would help to stabilize the debt ratio of the majority of IDA countries in our sample, but a larger number of them would benefit from a re-denomination of loans in local currency. A main lesson from our analysis is that a 'one size fits all solution' does not exist to the problem of stabilizing the debt ratio. This suggests that a reform of multilateral lending that is desirable to all LICs would be difficult to implement

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries' characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.

We develop a new structural Vector Autoregressive (SVAR) model for analysis with mixed-frequency data. The MIDAS-SVAR model allows to identify structural dynamic links exploiting the information contained in variables sampled at different frequencies. It also provides a general framework to test homogeneous frequency-based representations versus mixed-frequency data models. A set of Monte Carlo experiments suggests that the test per-forms well both in terms of size and power. The MIDAS-SVAR is then used to study how monetary policy and financial uncertainty impact on the dynamics of gross capital inflows to the US. While no relation is found when using standard quarterly data, mixed frequency analysis exploiting the variability present in the series within the quarter shows that the effect of an interest rate shock is greater the longer the time lag between the month of the shock and the end of the quarter.

Three years after the birth of the European Monetary Union (EMU) economists are still divided in assessing the ability of its key institutions to provide macroeconomic stability and foster necessary reforms. Blending empirical and theoretical data, experts offer a comprehensive survey of recent research in macroeconomic policymaking within the EMU