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‘Market Discipline’, Lending Ceilings and Subnational Finance

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  • Elio Londero

Abstract

The ‘market discipline’ approach to subnational finance requires that moral hazard derived from the possibility of a central government bailout be made insignificantly small. Therefore, governments interested in following this approach and willing to abide by its rules should start by creating the conditions for a default and its resolution to be possible. This article discusses the use of lending ceilings as an instrument to allow the default, without dragging in the central government.

Suggested Citation

  • Elio Londero, 2005. "‘Market Discipline’, Lending Ceilings and Subnational Finance," Kyklos, Wiley Blackwell, vol. 58(4), pages 575-590, November.
    • Handle: RePEc:bla:kyklos:v:58:y:2005:i:4:p:575-590
    DOI: 10.1111/j.0023-5962.2005.00303.x
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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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