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Balance-of-Payments Rescue Packages: Can They Work?

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Author Info
Eduardo Fernández-Arias ()

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Abstract

This paper generates a typology of balance-of-payments crises under rational expectations, namely liquidity and solvency crises. The ex-post application of official financial rescue packages of sufficient size is a perfect cure for liquidity crises, but amounts to an ineffective and costly bailout of private investors in the case of solvency crises. Rescue program anticipation encourages borrowing, which offsets any solvency improvement. Due to likely imperfections in implementation, actual rescue programs entail official financial losses and may easily be counterproductive due to moral hazard.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 4046.

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Date of creation: Dec 1996
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Handle: RePEc:idb:wpaper:4046

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  1. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-fulfilling debt crises," Staff Report 211, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank. [Downloadable!]
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