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Country Insurance

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Listed:
  • Tito Cordella
  • Eduardo Levy Yeyati

Abstract

The recent wave of financial crises has fueled the debate on the effect of IFIs intervention on governments' incentives to undertake reforms. In this paper we treat this intervention more generally as a country insurance contract, and examine its implications in a stylized set-up. More precisely, we identify the conditions under which the positive insurance effect dominates moral hazard considerations, and the channels through which this is achieved. In particular, we find that the case for country insurance is stronger for crisis-prone volatile economies, especially so if assistance is made contingent on the occurrence of adverse external macroeconomic shocks. Overall, our findings argue in favor of fairly-priced country insurance or insurance-type standing credit facilities that can be factored in ex ante by the borrowing government, as opposed to the customized discretionary bailouts

Suggested Citation

  • Tito Cordella & Eduardo Levy Yeyati, 2004. "Country Insurance," Econometric Society 2004 North American Summer Meetings 290, Econometric Society.
  • Handle: RePEc:ecm:nasm04:290
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    References listed on IDEAS

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    1. Cordella, Tito & Yeyati, Eduardo Levy, 2003. "Bank bailouts: moral hazard vs. value effect," Journal of Financial Intermediation, Elsevier, vol. 12(4), pages 300-330, October.
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    11. Steven T Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
    12. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR;CES;MSH, vol. 19(38), pages 165-216, April.
    13. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
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    Cited by:

    1. Daniel Kapp & Marco Vega, 2014. "Real output costs of financial crises: A loss distribution approach," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 37(103), pages 13-28, Abril.
    2. Kletzer, Kenneth, 2004. "Sovereign Debt, Volatility and Insurance," Santa Cruz Center for International Economics, Working Paper Series qt71b785gd, Center for International Economics, UC Santa Cruz.
    3. Shim, Ilhyock & Sharma, Sunil & Chami, Ralph, 2008. "A Model of the IMF as a Coinsurance Arrangement," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-41.
    4. Horacio Sapriza & Filippo Taddei & Guido Sandleris, 2008. "Indexed Sovereign Debt: An Applied Framework," 2008 Meeting Papers 1064, Society for Economic Dynamics.
    5. J. Brandes & Tobias Schüle, 2008. "IMF’s assistance: Devil’s kiss or guardian angel?," Journal of Economics, Springer, vol. 94(1), pages 63-86, June.
    6. Ronald U. Mendoza, 2007. "A Compendium of Policy Instruments to Enhance Financial Stability and Debt Management in Emerging Market Economies," Working Papers 48, United Nations, Department of Economics and Social Affairs.
    7. Eduardo Levy Yeyati, 2008. "Liquidity Insurance in a Financially Dollarized Economy," NBER Chapters,in: Financial Markets Volatility and Performance in Emerging Markets, pages 185-218 National Bureau of Economic Research, Inc.
    8. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters,in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    9. Eduardo Fernandez-Arias, 2010. "Multilateral Safety Nets for Financial Crises," Research Department Publications 4668, Inter-American Development Bank, Research Department.
    10. Daniel Kapp & Marco Vega, 2012. "Real Output Costs of Financial Crises: A Loss Distribution Approach," Papers 1201.0967, arXiv.org, revised May 2012.
    11. Berger, Helge & Hefeker, Carsten, 2006. "Does financial integration make banks act more prudential? Regulation, foreign owned banks, and the lender-of-last resort," Discussion Papers 2006/2, Free University Berlin, School of Business & Economics.
    12. Noy, Ilan, 2008. "Sovereign default risk, the IMF and creditor moral hazard," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 64-78, February.
    13. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers 349, Netherlands Central Bank, Research Department.
    14. Guido Sandleris & Filippo Taddei, 2007. "Indexed Sovereign Debt: a Survey and a Framework of Analysis," Carlo Alberto Notebooks 66, Collegio Carlo Alberto.
    15. Eduardo Levy Yeyati & Alain Ize & Miguel A. Kiguel, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economies," IMF Working Papers 05/188, International Monetary Fund.
    16. Kapp, Daniel & Vega, Marco, 2012. "The Real Output Costs of Financial Crisis: A Loss Distribution Approach," Working Papers 2012-013, Banco Central de Reserva del Perú.
    17. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
    18. Eduardo Levy Yeyati, 2004. "Recurrent Debt Problems and International Safety Nets," Business School Working Papers safetynets, Universidad Torcuato Di Tella.
    19. Barry Eichengreen, 2007. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," Open Economies Review, Springer, vol. 18(1), pages 27-52, February.
    20. Jan Willem Gunning, 2005. "Pourquoi donner de l'aide ?," Revue d’économie du développement, De Boeck Université, vol. 13(2), pages 7-50.
    21. Alain Ize & Miguel Kiguel & Eduardo Levy Yeyati, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economy," Business School Working Papers managsystrisk, Universidad Torcuato Di Tella.
    22. Helge Berger & Carsten Hefeker, 2008. "Does financial integration make banks more vulnerable? Regulation, foreign owned banks, and the lender-of-last resort," International Economics and Economic Policy, Springer, vol. 4(4), pages 371-393, February.

    More about this item

    Keywords

    Financial Crises; Bailouts; Moral Hazard; Insurance Effect;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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