Market Discipline and Exuberant Foreign Borrowing
AbstractRecent crises in emerging markets call into question the effectiveness of market discipline for ensuring efficient foreign borrowing. We review arguments that indicate that market discipline is limited by lack of information and may be dangerously distorted by moral hazard induced by official guarantees. Aside from these well-known concerns, we show that the market fails to internalize country risk and panic risk, which leads to inefficient borrowing even in the absence of traditional distortions. We also discuss optimal tax and trade policy as well as the role of liquidity facilities to address these externalities.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 122.
Date of creation: Nov 2001
Date of revision:
Other versions of this item:
- Eduardo Fernández-Arias & Davide Lombardo, 2002. "Market Discipline and Exuberant Foreign Borrowing," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 11, pages 333-360 Central Bank of Chile.
- NEP-ALL-2004-02-10 (All new papers)
- NEP-MIC-2002-02-15 (Microeconomics)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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