Munich Personal RePEc Archive

‘MARKET DISCIPLINE’, LENDING CEILINGS AND SUBNATIONAL FINANCE

Londero, Elio (2005): ‘MARKET DISCIPLINE’, LENDING CEILINGS AND SUBNATIONAL FINANCE. Published in: KYKLOS , Vol. 58, No. 4 (2005): pp. 575-590.

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Abstract

The ‘market discipline’ approach to subnational finance requires that moral hazard derived from the possibility of a central government bailout be made insignificantly small. Therefore, governments interested in following this approach and willing to abide by its rules should start by creating the conditions for a default and its resolution to be possible. This article discusses the use of lending ceilings as an instrument to allow the default without dragging in the central government.

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