Rescue Packages and Output Losses Following Crises
NBER Working Paper No. 8315
This paper examines the role of the third party (the IMF) in resolving sovereign default on external debt. We first show that the effects of third party intervention in debt negotiations are quite sensitive to the assumed enforcement mechanism for sovereign debt. The model is then adapted to an insurance crisis. The main result is that the unanticipated component of third party intervention can either intensify or mitigate the dead weight loss following default.
Published: Rescue Packages and Output Losses Following Crises, Michael P. Dooley, Sujata Verma, in Managing Currency Crises in Emerging Markets (2003), University of Chicago Press