International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies
IMF Working Papers, March 1, 2006
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- International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies
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Bibliographic details
- Authors: Kenneth Kletzer
- Published: March 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863390.001
Summary and central question
- Considers consequences of international financial market integration for national fiscal and monetary policies given the absence of an international sovereign authority to define and enforce contractual obligations across borders.
- Emphasizes sovereign immunity of national governments as a fundamental constraint on international finance and uses it to derive intertemporal budget constraints for sovereign nations and their governments.
Key findings and theoretical results
- The appropriate debt limit for a country allows for state-contingent repayment.
- With noncontingent debt instruments, debt renegotiation occurs in equilibrium with positive probability.
- A model of tax smoothing shows how information imperfections lead to conventional bond contracts that are renegotiated when a critical level of indebtedness is reached.
- Renegotiation can be interpreted in terms of nominal and real denominated bonds.
Implications for policy and macroeconomic variables
- Intertemporal borrowing constraint for monetary policies:
- Debt limits and the possibility of renegotiation constrain monetary policy choices through the interaction of debt denomination and sovereign default/renegotiation risk.
- Accumulation of reserve assets:
- The presence of state-contingent repayment and renegotiation probabilities influences optimal reserve accumulation strategies.
- Current account sustainability:
- International financial integration, debt contract design, and sovereign immunity considerations have direct implications for current account dynamics and sustainability.
Methodology and modeling approach
- Uses sovereign immunity as a constraint to derive intertemporal budget constraints.
- Adopts a tax-smoothing model to analyze how information imperfections affect bond contract design and lead to renegotiation at high indebtedness thresholds.
Publication and descriptive metadata
- By Kenneth Kletzer
- March 1, 2006
- Pages: 26
- Volume: 2006
- Issue: 079
- Series: Working Paper No. 2006/079
- DOI: https://doi.org/10.5089/9781451863390.001
- Stock No: WPIEA2006079
- ISBN: 9781451863390
- ISSN: 1018-5941
- Subject: Bonds, Debt limits, Expenditure, Inflation, Public debt
- Keywords: debt limit, monetary policy, present value, WP
- Citation format shown: Kenneth Kletzer. "International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies", IMF Working Papers 2006, 079 (2006), accessed 9/13/2026, https://doi.org/10.5089/9781451863390.001
IMF Working Paper No. 2006/079.