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 have incentives to rescue a crisis
country because they want to prevent the spread of the crisis to their own country.
On the other hand, governments experience pressures from domestic constituents
who are oftentimes opposed to financial rescues. Politicians aim to balance these
countervailing pressures. Whereas they are more likely to provide financial support
when their country’s economy is closely integrated with the crisis country’s economy,
elections may have a detrimental effect on the likelihood of a financial rescue,
particularly if the home country’s economy is not doing well itself. We test our
hypotheses using a new data set on international financial rescues 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.