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Bail out or work out? theoretical considerations

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  • Andrew G Haldane
  • Gregor Irwin
  • Victoria Saporta

Abstract

This paper assesses various crisis resolution proposals using a theoretical model of liquidity and solvency crisis. The model suggests that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, while coordinated lending through creditor committees is second-best. Debt write-downs are preferred to subsidised IMF financing when dealing with solvency crises, because of the negative moral hazard implications of the latter tool. Finally, the model suggests that international bankruptcy court proposals may be superior to existing contractual approaches in securing such write-downs. Copyright 2004 Royal Economic Society.

Suggested Citation

  • Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? theoretical considerations," Economic Journal, Royal Economic Society, vol. 114(494), pages 130-148, March.
    • Handle: RePEc:ecj:econjl:v:114:y:2004:i:494:p:c130-c148
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    References listed on IDEAS

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    1. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," FRB Atlanta Working Paper 98-10, Federal Reserve Bank of Atlanta.
    2. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
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    Cited by:

    1. Jarita Duasa & Paul Mosley, 2006. "Capital Controls Re‐examined: The Case for ‘Smart’ Controls," The World Economy, Wiley Blackwell, vol. 29(9), pages 1203-1226, September.
    2. Gregor Irwin & David Vines, 2005. "The efficient resolution of capital account crises: how to avoid moral hazard," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 233-250.
    3. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
    4. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
    5. Aitor Erce, 2013. "Sovereign debt crises: could an international court minimize them?," Globalization Institute Working Papers 142, Federal Reserve Bank of Dallas.
    6. Aitor Erce-Domínguez, 2006. "Using standstills to manage sovereign debt crises," Working Papers 0636, Banco de España.

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    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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