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Crises and Liquidity

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  • Enrica Detragiache
  • Antonio Spilimbergo

Abstract

In a large panel of countries, we find that less liquid countries are more likely to default on their external debt. Specifically, for given total external debt, the probability of a crisis increases with the proportion of short-term debt and debt service coming due and decreases with foreign exchange reserves. This correlation, however, is consistent with a standard model of optimal default and need not be ascribed to self-fulfilling creditor runs. Also, the correlation with short-term debt appears to be driven by joint endogeneity. The policy implications are discussed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/2.

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Length: 30
Date of creation: 01 Jan 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/2

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  1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  2. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1921, C.E.P.R. Discussion Papers.
  3. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 88-97, January.
  4. Andrew Berg & Catherine Pattillo, 1999. "Are Currency Crises Predictable? A Test," IMF Staff Papers, Palgrave Macmillan, vol. 46(2), pages 1.
  5. Eichengreen, Barry & Mody, Ashoka, 1999. "Lending booms, reserves, and the sustainability of short-term debt - inferences from the pricing of syndicated bank loans," Policy Research Working Paper Series 2155, The World Bank.
  6. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
  7. Diamond, Douglas W. & Rajan, Raghuram G., 2001. "Banks, short-term debt and financial crises: theory, policy implications and applications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 54(1), pages 37-71, June.
  8. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, Elsevier, vol. 48(1), pages 133-153, February.
  9. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  10. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 169-194, June.
  11. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
  12. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.
  13. Enrica Detragiache, 1996. "Rational Liquidity Crises in the Sovereign Debt Market," IMF Working Papers 96/38, International Monetary Fund.
  14. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 78(4), pages 647-61, September.
  15. Mark J. Flannery, 1991. "Debt maturity and the deadweight cost of leverage: optimally financing banking firms," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov.
  16. Enrica Detragiache, 1996. "Rational Liquidity Crises in the Sovereign Debt Market: In Search of a Theory," IMF Staff Papers, Palgrave Macmillan, vol. 43(3), pages 545-570, September.
  17. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  18. Jeanne, Olivier, 2000. "Debt Maturity and the Global Financial Architecture," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2520, C.E.P.R. Discussion Papers.
  19. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
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