The efficient resolution of capital account crises: how to avoid moral hazard
This paper presents a model of capital account crises and uses it to study resolution mechanisms for both liquidity and solvency crises. It shows that liquidity crises should be dealt with by a standstill combined with IMF lending into arrears, whereas solvency crises should be resolved by debt write-downs. Dealing with solvency crises by lending would require a subsidy and this creates moral hazard, such as incentives for excessive borrowing, for too little equity financing and for investment in projects that are inefficient. The analysis underlines the importance of accurately assessing whether a crisis is rooted in a liquidity or a solvency problem.
|Date of creation:||Oct 2004|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
- Geanakoplos, J. D. & Tsomocos, D. P., 2002.
"International finance in general equilibrium,"
Research in Economics,
Elsevier, vol. 56(1), pages 85-142, June.
- John Geanakoplos & Dimitri P. Tsomocos, 2001. "International Finance in General Equilibrium," Cowles Foundation Discussion Papers 1313, Cowles Foundation for Research in Economics, Yale University.
- Prasanna Gai & Ashley Taylor, 2004. "International Financial Rescues and Debtor-Country Moral Hazard," International Finance, Wiley Blackwell, vol. 7(3), pages 391-420, December.
- Ashley Taylor & Prasanna Gai, 2004. "International financial rescues and debtor-country moral hazard," Econometric Society 2004 Far Eastern Meetings 561, Econometric Society.
- Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor country moral hazard," Money Macro and Finance (MMF) Research Group Conference 2003 34, Money Macro and Finance Research Group.
- Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor-country moral hazard," Bank of England working papers 217, Bank of England.
- Dimitrios P. Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," LSE Research Online Documents on Economics 24826, London School of Economics and Political Science, LSE Library.
- Dimitrios P Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," Bank of England working papers 175, Bank of England.
- Dimitrios Tsomocos, 2003. "Equilibrium Analysis, Banking, Contagion and Financial Fragility," OFRC Working Papers Series 2003fe03, Oxford Financial Research Centre.
- Dimitrios Tsomocos, 2003. "Equilibrium analysis, banking, contagion and financial fragility," FMG Discussion Papers dp450, Financial Markets Group.
- 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, 03.
- Saporta, Victoria & Andrew G Haldane & Gregor Irwin, 2003. "Bail-Out or Work-Out? Theoretical Considerations," Royal Economic Society Annual Conference 2003 181, Royal Economic Society.
- Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? Theoretical considerations," Bank of England working papers 219, Bank of England.
- 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.
- Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
- Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series 563, CESifo Group Munich.
- Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
- Giovanni Dell'Ariccia & Jeronimo Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending; A Test," IMF Working Papers 02/181, International Monetary Fund. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:233. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.