Ejercicio Short Question 5 · Economia de L'empresa UPF 2011

Short Question 5 (6 points). Bailouts and incentive distortion

Consider the following two commentaries regarding financial rescues during an economic crisis:

An article argues that if the Central Bank assists governments that engaged in excessive public spending, it signals that accumulating large deficits is harmless because an institutional rescue will always arrive.

An editorial in a financial magazine states: “the key issue is that the offer of external assistance will weaken the urgency for distressed nations to implement structural reforms.”