‘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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: lending ceilings, fiscal institutions, subnational finance, banking regulations, moral hazard, market discipline, bailout
• Subjects: G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing

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