Toward a Lender of First Resort /

Toward a Lender of First Resort /

If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the "good" over the "...

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Bibliographic Details
Main Author: Cohen, Daniel
Other Authors: Portes, Richard
Format: Journal
Language:English
Published: Washington, D.C. : International Monetary Fund, 2006.
Series:IMF Working Papers; Working Paper ; No. 2006/066
Online Access:Full text available on IMF
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520 3 |a If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the "good" over the "bad" equilibrium. We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows. This is based on a simple taxonomy that breaks down the origin of crises into three components: confidence (spreads and currency crisis), fundamentals (real growth rate), and economic policy (primary deficit). Theory then suggests a set of circumstances in which a lender of first resort would be desirable. The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives. Theory also illuminates the potential role of collective action clauses in reducing the risk of self-fulfilling debt crises. 
538 |a Mode of access: Internet 
700 1 |a Portes, Richard. 
830 0 |a IMF Working Papers; Working Paper ;  |v No. 2006/066 
856 4 0 |z Full text available on IMF  |u http://elibrary.imf.org/view/journals/001/2006/066/001.2006.issue-066-en.xml  |z IMF e-Library 

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