Liquidity Crisis and the International Financial Architecture
18 Pages Posted: 18 Sep 2000
Date Written: July 31, 1999
The paper analyzes the effect of different proposals for the new international financial architecture in an open economy liquidity crises model. It shows that an international lender of last resort that provides a complete financial rescue leads, in the short run, to a lower probability of a BoP crises and financial runs. However, the perverse incentive of a complete bailout lead to an increasing probability of financial runs in the long run. A partial financial package may not reduce the probability of financial runs and twin crises. Private sectors participation rules can increase the probability of financial runs and twin crises if a large proportion of foreign investors expect to withdraw their investments without loss. The introduction of various types of capital controls generates different results. Exit taxes on short-run outflows appear more effective in preventing crises than fixed entry fees, while both have a similar impact on inflows. BoP contingent (on crises) exit taxes appear quite effective in preventing BoP crises without reducing substancially capital inflows (vis-avis short-run outflow taxes).
JEL Classification: F32, F33
Suggested Citation: Suggested Citation