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Rescue Packages and Output Losses Following Crises

In: Managing Currency Crises in Emerging Markets

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  • Michael P. Dooley
  • Sujata Verma

Abstract

This paper examines the role of the third party (the IMF) in resolving sovereign default on external debt. We first show that the effects of third party intervention in debt negotiations are quite sensitive to the assumed enforcement mechanism for sovereign debt. The model is then adapted to an insurance crisis. The main result is that the unanticipated component of third party intervention can either intensify or mitigate the dead weight loss following default.

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This chapter was published in:

  • Michael P. Dooley & Jeffrey A. Frankel, 2003. "Managing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number dool03-1, January.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 9650.

    Handle: RePEc:nbr:nberch:9650

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    1. Timothy D. Lane & Marianne Schulze-Gattas & T. M. Tsikata & Steven Phillips & Atish R. Ghosh & A. Javier Hamann, 1999. "IMF-Supported Programs in Indonesia, Korea and Thailand," IMF Occasional Papers 178, International Monetary Fund.
    2. Leslie Teo & Charles Enoch & Carl-Johan Lindgren & Tomás J. T. Baliño & Anne Marie Gulde & Marc Quintyn, 2000. "Financial Sector Crisis and Restructuring," IMF Occasional Papers 188, International Monetary Fund.
    3. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(1), pages 23-46, February.
    4. Dollar, David & Hallward-Driemeier, Mary, 2000. "Crisis, Adjustment, and Reform in Thailand's Industrial Firms," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(1), pages 1-22, February.
    5. Mark R. Stone, 2000. "The Corporate Sector Dynamics of Systemic Financial Crises," IMF Working Papers 00/114, International Monetary Fund.
    6. Anne Krueger & Aaron Tornell, 1999. "The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98," NBER Working Papers 7042, National Bureau of Economic Research, Inc.
    7. Ofek, Eli, 1993. "Capital structure and firm response to poor performance: An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(1), pages 3-30, August.
    8. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    9. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
    10. Honohan, Patrick & Klingebiel, Daniela, 2000. "Controlling the fiscal costs of banking crises," Policy Research Working Paper Series 2441, The World Bank.
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    Cited by:
    1. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
    2. Prasanna Gai & Simon Hayes & Hyun Song Shin, 2001. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," Bank of England working papers 136, Bank of England.
    3. David Fernando López Angarita, 2006. "Nivel de reservas internacionales y riesgo cambiario en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 117-159, July-Dece.
    4. Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
    5. Andrew Powell y Leandro Arozamena, 2003. "Liquidity Protection versus Moral Hazard: The Role of the IMF," Business School Working Papers ocho, Universidad Torcuato Di Tella.
    6. Carlos Arteta & Galina Hale, 2006. "Sovereign debt crises and credit to the private sector," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 878, Board of Governors of the Federal Reserve System (U.S.).
    7. Frankel, Jeffrey, 2011. "Monetary Policy in Emerging Markets: A Survey," Working Paper Series rwp11-003, Harvard University, John F. Kennedy School of Government.
    8. Suheyla Ozyildirim & Bulent Yaman, 2005. "Optimal versus adequate level of international reserves: evidence for Turkey," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(13), pages 1557-1569.
    9. Sergio Masciantonio, 2005. "The Role of Preference Structure and Moral Hazard in a Multiple Equilibria. Model of Financial Crises," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 95(6), pages 135-165, November-.
    10. David Fernando LOPEZ ANGARITA, 2006. "Nivel óptimo de Reservas Internacionales y crisis cambiaria en Colombia," ARCHIVOS DE ECONOMÍA 003273, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
    11. Claessens,Constantijn A. & Klingebiel, Daniela & Laeven, Luc, 2004. "Resolving systemic financial crisis : policies and institutions," Policy Research Working Paper Series 3377, The World Bank.
    12. 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.

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