Can Output Losses Following International Financial Crises be Avoided?Recent financial crises in emerging markets have been followed by temporary but substantial losses in output. This paper explores the possibility that threats of such losses are the dominant incentive for repayment of international debt. In this environment private debtors and creditors have strong incentives to design international contracts so that renegotiation is costly. Such contracts generate dead weight losses and proposals for reform of the international monetary system that modify explicit and implicit contractual arrangements and can be welfare improving under special circumstances. However, such proposals might also weaken the incentives that make private international debt possible. |
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asset bad luck defaults bank run behavior borrow capital flight credible creditor countries creditor governments crises in emerging crisis dead weight loss debtor countries debtor government debtors and creditors developing countries difficult to renegotiate distorted domestic financial Dooley Economics Ecuador emerging markets equity ex ante financial crises financial intermediation following an unavoidable foreign framework Fund Fund's government intervention hard copy important incentive for repayment inside the back instructions inside international capital markets international debt international monetary system investment Korean banks last resort lender of last lending liquidity crises loss in output Macroeconomics Martin Feldstein mitigate the costs Monetary Policy moral hazard NBER Working Papers negotiation official creditors papers in hard Partial Subscription payments private debtors probability 1-0 problem prone to crises recent crises sanctioned default share single area sovereign debt strategic default structure suggests threat Title Date U.S. bank unavoidable default welfare improving www.nber.org To order