The market for credit lines (CLs) to mitigate the sudden stop of capital flows does not exist in practice. Why? Theoretical findings in this article are as follows. First, the basic reason lies in ‘additional’ agency costs. Second, externalities can play a role but only if agency costs are high. Third, funding liquidity is hardly a problem. Findings on the policy are as follows. Depending on the parameter values, it is an optimal policy to (a) enable the market for the relevant CLs, (b) enable this market and correct it for externalities or (c) let the market not exist.
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