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The efficient resolution of capital account crises: how to avoid moral hazard

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Author Info
Gregor Irwin (Bank of England, UK)
David Vines (University of Oxford, UK, Australian National University and CEPR)

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Abstract

This paper presents a model of capital account crises and uses it to study resolution mechanisms for both liquidity and solvency crises. It shows that liquidity crises should be dealt with by a standstill combined with IMF lending into arrears, whereas solvency crises should be resolved by debt write-downs. Dealing with solvency crises by lending would require a subsidy and this creates moral hazard, such as incentives for excessive borrowing, for too little equity financing and for investment in projects that are inefficient. The analysis underlines the importance of accurately assessing whether a crisis is rooted in a liquidity or a solvency problem. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.270
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 10 (2005)
Issue (Month): 3 ()
Pages: 233-250
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Handle: RePEc:ijf:ijfiec:v:10:y:2005:i:3:p:233-250

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Andrew G Haldane & J"rg Scheibe, . "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England. [Downloadable!]
  2. Geanakoplos, J. D. & Tsomocos, D. P., 2002. "International finance in general equilibrium," Research in Economics, Elsevier, vol. 56(1), pages 85-142, June. [Downloadable!] (restricted)
    Other versions:
  3. Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor country moral hazard," Money Macro and Finance (MMF) Research Group Conference 2003 34, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  4. Dimitrios Tsomocos, 2003. "Equilibrium Analysis, Banking, Contagion and Financial Fragility," OFRC Working Papers Series 2003fe03, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  5. Isabel Schnabel & Giovanni Dell'Ariccia & Jeromin Zettelmeyer, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund. [Downloadable!]
  6. Jeanne, Olivier & Zettelmeyer, Jeromin, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  7. Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? theoretical considerations," Economic Journal, Royal Economic Society, vol. 114(494), pages C130-C148, 03. [Downloadable!] (restricted)
  8. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall. [Downloadable!] (restricted)
  9. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philipp Maier, 2007. "Do We Need the IMF to Resolve a Crisis? Lessons from Past Episodes of Debt Restructuring," Working Papers 07-10, Bank of Canada. [Downloadable!]
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