Crises and Liquidity: Evidence and Interpretation

IMF Working Papers, January 1, 2001

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Crises and Liquidity: Evidence and Interpretation

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Bibliographic details

• Authors: Enrica Detragiache, Antonio Spilimbergo
• Published: January 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451841763.001

Summary findings

• Less liquid countries are more likely to default on their external debt in a large panel of countries.
• For given total external debt:
  • The probability of a crisis increases with the proportion of short-term debt.
  • The probability of a crisis increases with debt service coming due.
  • The probability of a crisis decreases with foreign exchange reserves.
• The observed correlations are consistent with a standard model of optimal default and need not be ascribed to self-fulfilling creditor runs.
• The correlation with short-term debt appears to be driven by joint endogeneity.
• Policy implications are discussed in the paper.

Interpretation and analytical context

• Empirical correlations (short-term debt share, debt service due, foreign exchange reserves) are consistent with theoretical optimal-default models rather than implying inevitable creditor-run mechanisms.
• Joint endogeneity is identified as an important driver of the correlation between crisis probability and short-term debt.

Policy implications (as discussed)

• The paper discusses policy implications arising from the links between liquidity structure (short-term debt, debt service schedule, reserves) and crisis probability.
• Specific policy recommendations are part of the paper’s discussion (see full working paper for details).

Content in this bundle

• Crises and Liquidity: Evidence and Interpretation - WP/01/2
  • Crises and Liquidity: Evidence and Interpretation - WP/01/2 (Markdown version)
  • Crises and Liquidity: Evidence and Interpretation - WP/01/2 (PDF)