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... National economies thatshave become insolvent and face financial crisis apply for rescue and usually obtainsassistance from international financial agencies or the international financial communitys(=-=Fischer 1999-=-).s2.2 The MotivessThe motives of the BC-organization asking for rescue and support do not requiresmuch explanation; they are self-evident in the case of profit-motivated organizations. Ofscourse, the...

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...negie Mellon University. ** Carnegie Mellon University and the American Enterprise Institute. The authors gratefully acknowledge comments and discussions of Lee Buchheit, Charles Calomiris, James Haskel, Bennett McCallum, Bernardo Paasche, Steven Schwarcz, Anna Schwartz, Sanjay Srivastava, Chris Telmer, Xavier Bonnet, Doris Grimm, Stephan Litschig, Mads Toftegaard Madsen, Jan Willem van den Wall Bake and Mohamed El-Erian, Abigail McKenna, Jay Newman and other members of the Emerging Markets Creditors Association. 1 Recent discussions include Calomiris (1998), Capie (1998), Eichengreen (1999), Fischer (1999), Fratianni and Pattison (2001), Goodhart (1999), Jeanne and Wyplosz (2000), Sachs (1999), and Willett (2001). 2 An international LOLR differs from its domestic counterpart in another way. A domestic monetary authority creates reserves or base money in its own currency. It satisfies a demand for liquidity if markets are illiquid, as in the banking crises described by Bagehot, and perhaps in the 1987 stock market decline and at other times. The analogous role of an international lender of last resort would be to provide foreign exchange. Again, most of the literature recognizes that countries a...

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... at current exchange rates, it has limited resources to finance a withdrawal of liquid foreign exchange deposits, or of domestic currency deposits which are immediately converted to foreign exchange (=-=Fischer, 1999-=-). The Argentine crisis of 1989 represents a dramatic example of this mechanism in action, (Beckerman, 1992, Giorgio and Sagari, 1996) as does the later experience of 1994-95 in the same country (D'Am...

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...ies; free relief will change the amount of prevention they do primarily through the substitution effect of relief being cheaper. Whatever income effect the government gets from free relief will most certainly be spent on other programs, such as education or the military. Thus, when the substitution effect dominates the income effect, the situations described in proposition 4 are also the situations where free relief will result in under-prevention, and hence more severe initial disasters. This relatively simple application of moral hazard is similar to other literature, from financial crises (Fischer, 1999) to insurance (Shavell, 1979), and as a general insight is known as the “Samaritan’s Dilemma” (Buchanan, 1975; Coate, 1995). Essentially, the bailout effect is the 23 following: if prevention is costly and relief is free, governments will under-spend on prevention. This is not to say that there will be no spending on floodplain management or on making sure that buildings are built to withstand earthquakes, but rather that at the margin, fewer dollars will be spent on preventative activities than would be the case in the absence of free humanitarian relief. This distortion has been noted in the...

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...s (at a penal rate of interest). In the world of the late 20th Century, the IMF has increasingly been called upon to perform a similar role, supplying liquidity to member countries insnancial crisis (=-=Fischer, 1999-=-). The IMF has not, until recently, charged penal rates for emergency lending; and nor has it, until recently, been able to disburse its funds quickly. But it does have the power to impose strict `con...