A Theory of International Crisis Lending and IMF Conditionality

34 Pages Posted: 18 Dec 2008

See all articles by Olivier Jeanne

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

Jonathan D. Ostry

International Monetary Fund (IMF)

Jeromin Zettelmeyer

European Bank for Reconstruction and Development (EBRD)

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Date Written: October 2008

Abstract

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.

JEL Classification: F02, F32, F33

Suggested Citation

Jeanne, Olivier and Ostry, Jonathan D. and Zettelmeyer, Jeromin, A Theory of International Crisis Lending and IMF Conditionality (October 2008). CEPR Discussion Paper No. DP7022. Available at SSRN: https://ssrn.com/abstract=1311146

Olivier Jeanne (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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Centre for Economic Policy Research (CEPR)

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Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Jeromin Zettelmeyer

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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