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

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  • Eduardo Fernández-Arias

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.

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  • Eduardo Fernández-Arias, 1996. "Balance-of-Payments Rescue Packages: Can They Work?," Research Department Publications 4046, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:4046
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