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Can Debt Crises Be Self-Fulfilling?

Author/Editor: Chamon, Marcos
Authorized for Distribution: June 1, 2004
Electronic Access: Free Full Text (PDF file size is 540KB)
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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: Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country. I show this type of coordination failure can be eliminated by a combination of state-contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well. This suggests that runs on the debt of a single borrower (such as the government) can be eliminated, and that self-fulfilling features are more plausible when articulated in a context in which externalities among many decentralized borrowers allow for economy-wide debt runs to occur.
 
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Series: Working Paper No. 04/99
Subject(s): Financial crisis | External debt | Public debt | Crisis prevention | Liquidity
Author's keyword(s): Debt crises | multiple equilibria | liquidity | financial innovation
 
English  
    Published:   June 1, 2004        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA0992004   Pages:   21
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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