Abstract

The large international bailouts of the 1990s have been criticized for generating moral hazard at the expense of the global taxpayer. We argue that this criticism is misleading because international bailouts create either no or very few costs to the international community. Instead, the problem is that bailouts may be used to facilitate bad domestic policies, thus creating moral hazard at the expense of domestic taxpayers. Ensuring that this does not happen may require a shift toward ex ante conditionality, in the sense that the availability and size of official crisis lending need to be conditional on government policies before the crisis.

Recent Staff Research