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Country Insurance

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  • Eduardo Levy Yeyati
  • Tito Cordella

Abstract

To understand the consequences of the presence of international safety nets on governments' incentives to undertake reforms, we model IFIs´ interventions as country insurance policies. We find that country insurance (especially when made contingent on negative external shocks) is more likely to foster reforms in crisis-prone volatile economies. The consequences of country insurance on reform incentives, however, hinge on the nature of the reforms being considered: "buffering" reforms aimed at mitigating the cost of crises will be partially substituted for by insurance, and may be ultimately discouraged; by contrast, "enhancing" reforms that pay off more generously in the absence of a crisis will instead be promoted

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 136.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:136

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Keywords: Bailouts; Moral Hazard; Insurance Effect; International Lender of Last Resort; Financial Crises;

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References

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  1. Roberto Chang & Andrés Velasco, 2001. "A Model Of Financial Crises In Emerging Markets," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 489-517, May.
  2. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
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  10. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
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  12. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
  13. Eduardo Levy Yeyati & Augusto de la Torre & Sergio Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina´s Currency Board," Business School Working Papers catorce, Universidad Torcuato Di Tella.
  14. 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.
  15. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
  16. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  17. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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