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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 University of Washington, Department of Economics in its series Working Papers with number 0044.

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Date of creation: Feb 1999
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Handle: RePEc:udb:wpaper:0044
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  17. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, vol. 63(1), pages 59-83, October.
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