A Theory of International Crisis Lending and IMF Conditionality
International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)
International Monetary Fund (IMF)
European Bank for Reconstruction and Development; CEPR
IMF Working Paper No. 08/236
We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to the IMF. Nonetheless, moral hazard can arise if there are crisis externalities across countries (contagion) or if country authorities discount crisis costs too much relative to the national social optimum, or both. Moral hazard can be avoided by making IMF lending conditional on crisis prevention efforts - "ex ante" conditionality.
Number of Pages in PDF File: 35
Keywords: Financial crisis, Crisis prevention, Fund role, Conditionality, Moral hazard, Spilloversworking papers series
Date posted: December 18, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.359 seconds