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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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Cited by:
  1. Andrew K. Rose & Mark M. Spiegel, 2009. "Noneconomic Engagement and International Exchange: The Case of Environmental Treaties," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(2-3), pages 337-363, 03.
  2. 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.
  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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