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Recurrent Debt Problems and International Safety Nets

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  • Eduardo Levy Yeyati

Abstract

In this paper, I revisit the moral hazard arguments in order to discuss alternative approaches to the role of the IFIs. In particular, I distinguish between lender, borrower and government moral hazard, according to how the costs and benefits of IFI intervention are distributed among the relevant players, and argue that it is the latter problem that should be at the center of the debate. In this light, I analyze the consequences of alternative modus operandi of the IFIs. I conclude that both casual evidence and economic analysis suggest that an explicit international safety net, by enhancing the expected returns of good policies as perceived by the government, may create the right incentives outweighing hazard considerations and, as a result, may help reduce the incidence of recurrent debt problems.

Suggested Citation

  • Eduardo Levy Yeyati, 2004. "Recurrent Debt Problems and International Safety Nets," Business School Working Papers safetynets, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:safetynets
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    File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-092004.pdf
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    References listed on IDEAS

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    1. Michael Mussa, 1999. "Reforming the International Financial Architecture: Limiting Moral Hazard and Containing Real Hazard," RBA Annual Conference Volume,in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia.
    2. de la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L, 2002. "Financial Globalization: Unequal Blessings," International Finance, Wiley Blackwell, vol. 5(3), pages 335-357, Winter.
    3. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    4. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
    5. Tito Cordella & Eduardo Levy Yeyati, 2005. "Country Insurance," IMF Staff Papers, Palgrave Macmillan, vol. 52(si), pages 1-6.
    6. repec:rus:hseeco:123922 is not listed on IDEAS
    7. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
    8. 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.
    9. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications (Working Papers) 1909, Inter-American Development Bank.
    10. Raquel Fernandez & Robert W. Rosenthal, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 331-349.
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