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- Title
The efficient resolution of capital account crises: how to avoid moral hazard.
- Authors
Irwin, Gregor; Vines, David
- Abstract
This article presents a model of capital account crises to evaluate alternative mechanisms for their resolution. As problems at the level of the firm translate into countrywide crises, policy intervention at a national or international (IMF) level becomes necessary. The paper reaches two major conclusions. The first is a criticism of a lender of last resort regime. If there is a lender of last resort, which not only resolves liquidity crises by the provision of finance, but also resolves solvency crises by subsidised lending at sufficiently reduced interest rates to avoid bankruptcy, there will be incentives to borrow excessively, and too little equity will be invested in projects. The second conclusion is in support of a lender of last resort regime, but only for liquidity crises and as part of the response necessary to deal with them. Debt write-downs are an inappropriate response in this situation as the problem is not one of solvency. IMF financing can and should play a part.
- Subjects
RISK management in business; LOANS; LIQUIDITY (Economics); INTERNATIONAL economic relations; DEFAULT (Finance); INTEREST rate futures
- Publication
Bank of England Quarterly Bulletin, 2004, Vol 44, Issue 4, p457
- ISSN
0005-5166
- Publication type
Article