Title

When Governments Gamble: Liquidity and Insolvency Crises in a Classroom Experiment

Abstract

Through a Perry Summer Research Award, I collaborated with a faculty member to design an experiment in international finance. Our experiment helps students understand the role of an international lender of last resort such as the International Monetary Fund. We show how the IMF can help a government in a liquidity crisis. This crisis occurs when the government cannot convince enough lenders to roll over their short-term debt. The problem is that the infrastructure (an airport, for example) the government built with these loans cannot immediately generate the cash to repay lenders. Through participation in the experiment and an analysis of results, students see how the IMF can help the government overcome this short-term funding gap. Students also come to understand that the IMF’s lender-of-last resort role gets more complicated in cases where the airport has some chance of failing, thereby sparking an insolvency crisis.

Faculty Sponsor

Denise Hazlett

Tracks

Development and Economics

Terms of Use

ARMINDA Terms of Use

Location

Maxey 104

Presentation Type

Oral Presentation

Research Funding Source or OCS Program

Perry Summer Research Award

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When Governments Gamble: Liquidity and Insolvency Crises in a Classroom Experiment

Maxey 104

Through a Perry Summer Research Award, I collaborated with a faculty member to design an experiment in international finance. Our experiment helps students understand the role of an international lender of last resort such as the International Monetary Fund. We show how the IMF can help a government in a liquidity crisis. This crisis occurs when the government cannot convince enough lenders to roll over their short-term debt. The problem is that the infrastructure (an airport, for example) the government built with these loans cannot immediately generate the cash to repay lenders. Through participation in the experiment and an analysis of results, students see how the IMF can help the government overcome this short-term funding gap. Students also come to understand that the IMF’s lender-of-last resort role gets more complicated in cases where the airport has some chance of failing, thereby sparking an insolvency crisis.

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