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Holding out for a haircut: financial crisis, moral hazard, and interest rate policy
Author(s) -
Dennis Benjamin,
Kandel Simon
Publication year - 2000
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/1099-1158(200007)5:3<233::aid-ijfe127>3.0.co;2-b
Subject(s) - economics , interest rate , bankruptcy , debt , moral hazard , restructuring , financial crisis , monetary economics , incentive , financial system , finance , macroeconomics , market economy
The International Monetary Fund (IMF)‐prescribed introduction of higher interest rates in crisis‐hit economies has been criticized as being unnecessarily contractionary. This criticism ignores the effects of interest rate policy on the incentives to restructure corporate debt once it has become strategically optimal for domestic firms to declare a state of over‐indebtedness. A widespread state of debt moratoria constitutes a ‘bad’ equilibrium, whereas the widespread adoption of a quick debt workout strategy is a potentially ‘good’ equilibrium. The latter can be encouraged through various policies, most controversially a short‐term policy of high interest rates. Other potential policies include: (i) widespread debt forgiveness; (ii) enhanced implementation of the bankruptcy court; and (iii) the enforcement of free market competition. Copyright © 2000 John Wiley & Sons, Ltd.