Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of San Francisco
Working Paper Series
Solvency runs, sunspot runs, and international bailouts
Mark M. Spiegel
Abstract

This paper introduces a model of international lender of last resort (ILLR) activity under asymmetric information. The ILLR is unable to distinguish between runs due to debtor insolvency and those which are the result of pure sunspots. Nevertheless, the ILLR can elicit the underlying state of nature from informed creditors by offering terms consistent with generating a separating equilibrium. Achieving the separating equilibrium requires that the ILLR lends to the debtor at sufficiently high rates. This adverse electing problem provides an alternative rationale for Bagehot's Principle of last-resort lending at high rates of interest to the moral hazard motivation commonly found in the literature.


Download Full text
Cite this item
Mark M. Spiegel, Solvency runs, sunspot runs, and international bailouts, Federal Reserve Bank of San Francisco, Working Paper Series 2001-05, 2000.
More from this series
JEL Classification:
Subject headings:
Keywords: Financial crises ; Lenders of last resort ; Debt
For corrections, contact Noah Pollaczek ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal