Abstract

During the 1990s, the concept of “catalytic official finance” (COF) gained prominence in policy debates. The concept revolves around the idea that the propensity of investors to lend to a country increases when the IMF provides its “seal of approval”—backed up by only limited official financing—on the country’s economic program. COF aims at avoiding, on the one hand, the massive use of public money to bail out private investors and, on the other, the recourse to coercive bailing-in mechanisms. This paper concludes that COF, while possibly useful in other contexts, is less reliable when used to manage capital account crises.

Recent Staff Research