Bilateral Financial Bailouts
Christina J. Schneider, Jennifer L. Tobin
March, 2013
Abstract
Why do governments provide bilateral bailouts to countries that experience financial crises above and beyond what the IMF provides? We argue that governments face a trade off. On one hand, they want to prevent the spread of the financial crisis to their own country by providing additional liquidity. On the other hand, governments experience pressures from domestic constituents who are oftentimes opposed to bailouts. Politicians aim to balance these countervailing pressures. Whereas they are more likely to provide bailout when their economy is exposed to negative spillover effects, elections may have a detrimental effect on bailouts, particularly if the home country’s economy is not doing well. We test our hypotheses using a new data set on bilateral bailouts by OECD countries between 1990 and 2010. Our statistical analysis finds robust support for the importance of domestic economic and political factors in international cooperation during financial crises.Keywords:
financial crisis, bilateral bailout