The Mussa Theorem (and Other Results on Imf-Induced Moral Hazard)

26 Pages Posted: 9 Feb 2006

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)

Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics; CEPR

Date Written: October 2004

Abstract

Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999, 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem.

Keywords: International Monetary Fund, Financial Crises, Moral Hazard

JEL Classification: F32, F33

Suggested Citation

Jeanne, Olivier and Zettelmeyer, Jeromin, The Mussa Theorem (and Other Results on Imf-Induced Moral Hazard) (October 2004). IMF Working Paper No. 04/192. Available at SSRN: https://ssrn.com/abstract=879017

Olivier Jeanne (Contact Author)

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

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Ecole Nationale des Ponts et Chaussees (ENPC) ( email )

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Centre for Economic Policy Research (CEPR)

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Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

CEPR ( email )

London
United Kingdom

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