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Timing of International Bailouts

Author/Editor: Kim, Se-Jik
Authorized for Distribution: January 1, 2004
Electronic Access: Free Full Text (PDF file size is 395KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper proposes that international rescue financing should not be provided to a country where a crisis first occurs, but rather to any country that suffers a subsequent crisis. Such a timing-based lending facility can be Pareto-superior to both laissez-faire and existing international crisis lending facilities, when domestic governments have more information on their own economies than does the international lender of last resort. The new facility mitigates moral hazard owing to information asymmetry by not rescuing the first-hit country. At the same time, it limits crisis contagion by rescuing countries in subsequent crises. Even in the presence of common shocks, the timing-based facility can reduce global risks of crisis because it induces countries to undertake greater crisis-prevention efforts so as not to become the first country hit.
 
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Series: Working Paper No. 04/9
Subject(s): Loans | Borrowing | Economic models
Author's keyword(s): International lender of last resort | crisis contagion | moral hazard | information asymmetry
 
English  
    Published:   January 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0092004   Pages:   41
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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