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The Analytical Tool (AT) is an integral part of the MTDS Toolkit, developed to provide a quantitative analysis as input to the MTDS decision-making process. The AT is a spreadsheet-based application that allows projecting cash flows as a function of: (i) existing debt; (ii) macroeconomic assumptions, i.e. the primary balance; (iii) new borrowing strategies; and (iv) financial variables, including interest rates and exchange rates. The tool then simulates different cash-flows under various scenarios. The output of the tool is a quantification of the costs and risks associated with a particular debt management strategy.
The AT facilitates the quantification of costs and risks for each strategy under consideration. By illustrating the consequences of following a particular strategy under various scenarios for macroeconomic and market variables, it gives insight into the key vulnerabilities embedded in the specific strategy under consideration. The output, generated by the AT is a number of cost and risk indicators, for example annual interest payment-to-GDP and the nominal stock of debt-to-GDP. Risk is measured in terms of the increase in cost, given a particular macro and market scenario, relative to the baseline. 1 The AT different cost and risk indicators, allow countries to focus on those measures most relevant for their needs.
Modigliani and Miller (1958) showed that in the case of efficient financial markets, the firm’s capital structure is irrelevant. The follow up theoretical work in the field takes into account the imperfections of markets and shows that capital structures emerge from three sources: firm-specific, country institutional and macroeconomic factors. The empirical research has focused on finding the best set of determinants of leverage (Titman and Wessel (1988); Frank and Goyal (2004)). Lack of comparable firm-level cross-country data has somewhat hindered the exploration of the significance of country factors. In the current paper I have evaluated the significance of all three sources.
The importance of the country of incorporation for firm leverage is only valued in few cross-country studies. Booth et al. (2001) show on a sample of firms from ten developing countries that country fixed effects explain a large share of leverage variation, but they do not evaluate what is behind the country effects. Using a sample of firms from developing Asian and South American countries Schmukler and Vesperoni (2001) explore the relationship between leverage and financial liberalization. Giannetti (2003) shows using Western European firms that financial development and creditor protection are significant determinants of leverage. Also using Western European firms, Jõeveer (2005) shows that half of the country-based explanatory power is determined by six country macro and institutional factors, while the other half is explained by unquantifiable institutional differences. Desai et al. (2004) use US affiliates data to show how a country’s tax rate explains the level of firm leverage.
This paper aims at contributing to the research agenda on the sources of price stickiness, showing that the adoption of nominal price rigidity may be an optimal firms reaction to the consumers behavior, even if firms have no adjustment costs. With regular broadly accepted assumptions on economic agents behavior, we show that firms competition can lead to the adoption of sticky prices as an (sub game perfect) equilibrium strategy in order to attract more customers. The intuition behind the model formal conclusions are explained as follows.
