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Country Insurance

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  • Eduardo Levy Yeyati
  • Tito Cordella

Abstract

In this paper, we examine how the presence of country insurance schemes affects policymakers'' incentives to undertake reforms. Such schemes (especially when made contingent on negative external shocks) are more likely to foster than to delay reform in crisis-prone volatile economies. The consequences of country insurance, however, hinge on the nature of the reforms being considered: "buffering" reforms, aimed at mitigating the cost of crises, could be partially substituted for, and ultimately discouraged by, insurance. By contrast, "enhancing" reforms that pay off more generously in the absence of a crisis are likely to be promoted.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/148.

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Length: 26
Date of creation: 01 Aug 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/148

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Keywords: Moral hazard; Fiscal reforms; Economic models; market bond; hedging; capital market; bond; international financial architecture; emerging market bond; currency crises; domestic capital market; capital flows; hedge; exogenous shocks; international capital; international finance; financial stability; financial institutions; cost of capital; domestic capital; bond spreads; bond spread; adverse external shocks; discount rate; financial intermediation; liquidity crises; capital flow; financial contagion; financial vulnerabilities; capital flow reversals; financial contracts; financial instability; financial sector; international capital market; financial reform; financial system; liquidity support; international financial system; currency risk;

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References

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  1. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1687, C.E.P.R. Discussion Papers.
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  15. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 12(4), pages 300-330, October.
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