Balance-of-Payments Rescue Packages: Can They Work?

31 Pages Posted: 20 Apr 2011

Date Written: December 1996

Abstract

This paper generates a typology of balance-of-payments crises under rational expectations, namely liquidity and solvency crises. The ex-post application of official financial rescue packages of sufficient size is a perfect cure for liquidity crises, but amounts to an ineffective and costly bailout of private investors in the case of solvency crises. Rescue program anticipation encourages borrowing, which offsets any solvency improvement. Due to likely imperfections in implementation, actual rescue programs entail official financial losses and may easily be counterproductive due to moral hazard.

Suggested Citation

Fernandez-Arias, Eduardo, Balance-of-Payments Rescue Packages: Can They Work? (December 1996). IDB Working Paper No. 275, Available at SSRN: https://ssrn.com/abstract=1815962 or http://dx.doi.org/10.2139/ssrn.1815962

Eduardo Fernandez-Arias (Contact Author)

Inter-American Development Bank (IDB) ( email )

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