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Balance-of-Payments Rescue Packages: Can They Work?


  • Eduardo Fernández-Arias



This paper generates a typology of balance-of-payments crises under rational expectations, namely liquidity and solvency crises. The ex-post application of official financial rescue packages of sufficient size is a perfect cure for liquidity crises, but amounts to an ineffective and costly bailout of private investors in the case of solvency crises. Rescue program anticipation encourages borrowing, which offsets any solvency improvement. Due to likely imperfections in implementation, actual rescue programs entail official financial losses and may easily be counterproductive due to moral hazard.

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  • Eduardo Fernández-Arias, 1996. "Balance-of-Payments Rescue Packages: Can They Work?," Research Department Publications 4046, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4046

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    1. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," IDB Publications (Working Papers) 6292, Inter-American Development Bank.
    2. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth, 1996. "Is the Debt Crisis History? Recent Private Capital Inflows to Developing Countries," World Bank Economic Review, World Bank Group, vol. 10(1), pages 27-50, January.
    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. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," Research Department Publications 4008, Inter-American Development Bank, Research Department.
    5. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    6. Fernandez-Arias, Eduardo & Montiel, Peter J, 1996. "The Surge in Capital Inflows to Developing Countries: An Analytical Overview," World Bank Economic Review, World Bank Group, vol. 10(1), pages 51-77, January.
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