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Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?

  • Joshua Aizenman
  • Stephen Turnovsky

This paper characterises the effects of reserve requirements on financial loans in the presence of moral hazard on the lender side and sovereign risk on the borrower side. The impacts of such reserve requirements on the equilibrium default risk and borrowing are analysed and their welfare implications discussed. More generous bailouts, financed by the high-income block, encourage borrowing and increase the probability of default. The optimal reserve requirements for both lender and borrower are characterised. The introduction of a reserve requirement in either country reduces the default risk and raises the welfare of both the high-income and the emerging-market economies. Copyright Royal Economic Society 2002

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Paper provided by Department of Economics at the University of Washington in its series Discussion Papers in Economics at the University of Washington with number 0044.

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Date of creation: Feb 1999
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Handle: RePEc:fth:washer:0044
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  1. Ricardo J. Caballero & Arvind Krishnamurthy, 1998. "Emerging Market Crises: An Asset Markets Perspective," NBER Working Papers 6843, National Bureau of Economic Research, Inc.
  2. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
  3. Agenor, Pierre-Richard & Aizenman, Joshua, 1998. "Volatility and the welfare costs of financial market integration," Policy Research Working Paper Series 1974, The World Bank.
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  8. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  9. Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-61, March.
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  13. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  14. McKinnon, Ronald I., 1982. "The order of economic liberalization: Lessons from Chile and Argentina," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 159-186, January.
  15. Joseph P. Hughes & Loretta J. Mester, . "A Quality and Risk-Adjusted Cost Function for Banks: Evidence on the "Too-Big-To-Fail" Doctrine," Rodney L. White Center for Financial Research Working Papers 25-92, Wharton School Rodney L. White Center for Financial Research.
  16. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  17. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  18. Buiter, Willem H & Sibert, Anne C, 1999. "UDROP: A Contribution to the New International Financial Architecture," International Finance, Wiley Blackwell, vol. 2(2), pages 227-47, July.
  19. Bhandari, Jagdeep S. & Ul Haque, Nadeem & Turnovsky, Stephen J., 1989. "Growth, debt, and sovereign risk in a small, open economy," Policy Research Working Paper Series 260, The World Bank.
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