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Solvency runs, sunspot runs, and international bailouts

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  • Spiegel, Mark M.

Abstract

This paper introduces a model of international lender of last resort (ILLR) activity under asymmetric information. The ILLR is unable to distinguish between runs due to debtor insolvency and those which are the result of pure sunspots. Nevertheless, the ILLR can elicit the underlying state of nature from informed creditors by offering terms consistent with generating a separating equilibrium. Achieving the separating equilibrium requires that the ILLR lends to the debtor at sufficiently high rates. This adverse electing problem provides an alternative rationale for Bagehot's Principle of last-resort lending at high rates of interest to the moral hazard motivation commonly found in the literature.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 65 (2005)
Issue (Month): 1 (January)
Pages: 203-219

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Handle: RePEc:eee:inecon:v:65:y:2005:i:1:p:203-219

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Andrew K. Rose & Mark M. Spiegel, 2002. "A gravity model of sovereign lending: trade, default and credit," Working Paper Series 2002-09, Federal Reserve Bank of San Francisco.
  2. Sleet, Christopher & Smith, Bruce D, 2000. "Deposit Insurance and Lender-of-Last-Resort Functions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 518-75, August.
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  18. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  19. Haibin Zhu, 2001. "Bank runs without self-fulfilling prophecies," BIS Working Papers 106, Bank for International Settlements.
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Cited by:
  1. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.
  2. Andrew K. Rose & Mark M. Spiegel, 2006. "Non-economic engagement and international exchange: the case of environmental treaties," Working Paper Series 2006-33, Federal Reserve Bank of San Francisco.
  3. Misa Tanaka, 2005. "Bank loans versus bond finance: implications for sovereign debtors," Bank of England working papers 267, Bank of England.

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