IDEAS home Printed from https://ideas.repec.org/p/fip/fedfwp/2001-05.html
   My bibliography  Save this paper

Solvency runs, sunspot runs, and international bailouts

Author

Listed:
  • Mark M. Spiegel

Abstract

This paper introduces a model of international lender of last resort (ILLR) activity under asymmetric information. The ILLR is unable to distinguish between runs due to debtor insolvency and those which are the result of pure sunspots. Nevertheless, the ILLR can elicit the underlying state of nature from informed creditors by offering terms consistent with generating a separating equilibrium. Achieving the separating equilibrium requires that the ILLR lends to the debtor at sufficiently high rates. This adverse electing problem provides an alternative rationale for Bagehot's Principle of last-resort lending at high rates of interest to the moral hazard motivation commonly found in the literature.

Suggested Citation

  • Mark M. Spiegel, 2000. "Solvency runs, sunspot runs, and international bailouts," Working Paper Series 2001-05, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2001-05
    as

    Download full text from publisher

    File URL: http://www.frbsf.org/economic-research/files/wp01-05bk.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-667, August.
    2. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, August.
    3. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
    4. Jeanne, Olivier, 2000. "Debt Maturity and the Global Financial Architecture," CEPR Discussion Papers 2520, C.E.P.R. Discussion Papers.
    5. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    6. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters,in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
    7. Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
    8. Ilan Goldfajn & Rodrigo O. Valdes, 1997. "Capital Flows and the Twin Crises; The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
    9. 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.
    10. Spiegel, Mark M, 1992. "Concerted Lending: Did Large Banks Bear the Burden?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 465-482, November.
    11. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-592, June.
    12. Christopher Sleet & Bruce D. Smith, 2000. "Deposit insurance and lender-of-last-resort functions," Proceedings, Federal Reserve Bank of Cleveland, pages 518-579.
    13. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
    14. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
    15. Haizhou Huang & Charles Goodhart, 1999. "A Simple Model of an International Lender of Last Resort," FMG Discussion Papers dp336, Financial Markets Group.
    16. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages 111-125, March.
    17. Boyd, John H. & Smith, Bruce D., 1999. "The Use of Debt and Equity in Optimal Financial Contracts," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 270-316, October.
    18. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters,in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78 National Bureau of Economic Research, Inc.
    19. Haibin Zhu, 2001. "Bank runs without self-fulfilling prophecies," BIS Working Papers 106, Bank for International Settlements.
    20. Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 1-51, March.
    21. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, vol. 51(1), pages 169-194, June.
    22. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-761, July.
    23. Manmohan S. Kumar & Paul R Masson & Marcus Miller, 2000. "Global Financial Crises; Institutions and Incentives," IMF Working Papers 00/105, International Monetary Fund.
    24. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
    25. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew K. Rose & Mark M. Spiegel, 2009. "Noneconomic Engagement and International Exchange: The Case of Environmental Treaties," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 337-363, March.
    2. Misa Tanaka, 2006. "Bank Loans Versus Bond Finance: Implications for Sovereign Debtors," Economic Journal, Royal Economic Society, vol. 116(510), pages 149-171, March.
    3. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
    4. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.
    5. Bastidon, Cécile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:2001-05. 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: (Federal Reserve Bank of San Francisco Research Library). General contact details of provider: http://edirc.repec.org/data/frbsfus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.