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The Role of Preference Structure and Moral Hazard in a Multiple Equilibria. Model of Financial Crises

  • Sergio Masciantonio

    ()

    (Università degli Studi "Roma Tre")

This paper proposes an analysis of financial crises by a multiple equilibria model, based on the assumption of common knowledge. This model modifies and broadens the Corsetti, Guimaraes and Roubini (2003) model based on global games theory. In the first part we assert the implications for the International Monetary Fund (IMF) as an international lender of last resort, utilising existing literature based on multiple equilibria models. In the second part, we extend the analysis and highlight the interesting implications. The model predicts the IMF should not be too conservative in its decisions, while avoiding the excessive liquidity supports, which can lead to moral hazard distortions.

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File URL: http://www.rivistapoliticaeconomica.it/2005/nov-dic/Masciantonio_eng.pdf
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Article provided by SIPI Spa in its journal Rivista di Politica Economica.

Volume (Year): 95 (2005)
Issue (Month): 6 (November-December)
Pages: 135-165

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Handle: RePEc:rpo:ripoec:v:95:y:2005:i:6:p:135-165
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  1. Maurice Obstfeld, 2000. "The Global Capital Market: Benefactor or Menace?," International Finance 0004001, EconWPA.
  2. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 489-517.
  5. Olivier Jeanne & Charles Wyplosz, 2003. "The International Lender of Last Resort. How Large Is Large Enough?," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 89-124 National Bureau of Economic Research, Inc.
  6. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  7. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  8. Jeffrey D. Sachs, 1999. "Creditor Panics: Causes and Remedies," Cato Journal, Cato Journal, Cato Institute, vol. 18(3), pages 377-390, Winter.
  9. Michael P. Dooley & Sujata Verma, 2001. "Rescue Packages and Output Losses Following Crises," NBER Working Papers 8315, National Bureau of Economic Research, Inc.
  10. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  11. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  12. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  13. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
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