Chapter 14: Symposium on limiting the moral hazard in international financial rescues
14. Symposium on limiting the moral hazard in international ﬁnancial rescues* I do not pretend to have a ‘plan’ to limit the moral hazard in international ﬁnancial rescues. While moral hazard is a serious and diﬃcult problem, I am not sure it deserves highest priority among the issues raised by recent currency crises. We do not want to scrap lenders of last resort because moral hazards are intrinsic to them. Limiting the third-party eﬀects of currency crises and of the austere prescriptions for recovery from them is worth putting up with some moral hazard. Maybe the best approach is to limit the probability that international rescues will be necessary. For most countries ﬁxed exchange rates in their usual form, adjustable pegs (ﬁxed rates that can be changed) are a bad idea. Developing countries would be well advised to follow the example of the major capitalist countries and let their currencies ﬂoat like the dollar, yen and Deutsche Mark. It is hard to understand why this had not become normal practice long ago. It would have avoided the worst consequences of recent adjustments of exchange rates. If a country wants to peg its currency, it should be required to make arrangements with the ‘peggee’ central bank, which would give the satellite central bank a credit line in the reserve currency, to be drawn upon in emergency subject to rules agreed in advance. The idea would be to hold the line while an IMF package can be worked out. The...
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