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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 14: Symposium on limiting the moral hazard in international financial rescues

James Tobin


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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