Description

We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.

Taxonomy

Debt , Economic policy , Financial crisis , Fiscal policy , International financial system

More publications in this series: Working Papers

More publications by: Giovanni Dell'Ariccia ; Jeronimo Zettelmeyer ; Isabel Schnabel