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Timing of International Bailouts

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  • Se-Jik Kim
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    Abstract

    This paper proposes that international rescue financing should not be provided to a country where a crisis first occurs, but rather to any country that suffers a subsequent crisis. Such a timing-based lending facility can be Pareto-superior to both laissez-faire and existing international crisis lending facilities, when domestic governments have more information on their own economies than does the international lender of last resort. The new facility mitigates moral hazard owing to information asymmetry by not rescuing the first-hit country. At the same time, it limits crisis contagion by rescuing countries in subsequent crises. Even in the presence of common shocks, the timing-based facility can reduce global risks of crisis because it induces countries to undertake greater crisis-prevention efforts so as not to become the first country hit.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/9.

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    Length: 42
    Date of creation: 01 Jan 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/9

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    Related research

    Keywords: Moral hazard; Borrowing; Economic models; crisis prevention; contagion; crisis contagion; international crisis; crisis lending; crisis country; crisis countries; currency crises; international crisis lending; capital market; debt restructuring; foreign capital; economic crisis; financial crises; model of crisis; currency crisis; financial crisis; liquidity crisis; asian crisis; crisis probability; financial contagion; securities markets; capital employed; risk aversion; stock market; domestic capital; crisis management; crisis resolution; international financial crisis; financial distress;

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    Citations

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    Cited by:
    1. Bastidon, C├ęcile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, Elsevier, vol. 9(2), pages 144-152, June.
    2. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.

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