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Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?

  • Joshua Aizenman

    (University of California, Santa Cruz and NBER)

  • Stephen J. Turnovsky

    (University of Washington)

This paper characterises the effects of reserve requirements on financial loans in the presence of moral hazard on the lender side and sovereign risk on the borrower side. The impacts of such reserve requirements on the equilibrium default risk and borrowing are analysed and their welfare implications discussed. More generous bailouts, financed by the high-income block, encourage borrowing and increase the probability of default. The optimal reserve requirements for both lender and borrower are characterised. The introduction of a reserve requirement in either country reduces the default risk and raises the welfare of both the high-income and the emerging-market economies. Copyright Royal Economic Society 2002

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 112 (2002)
Issue (Month): 476 (January)
Pages: 107-132

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Handle: RePEc:ecj:econjl:v:112:y:2002:i:476:p:107-132
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