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Unconditional IMF Financial Support and Investor Moral Hazard
Author: Mr. Jun I Kim
Series:
IMF Working Papers
Volume/Issue:
Volume 2007: Issue 104
Language:
English
Publication Date:
01 May 2007
DOI:
https://doi.org/10.5089/9781451866681.001
ISBN:
9781451866681
ISSN:
1018-5941
Pages:
36
Keywords:
WP; investor moral hazard; mover accent; risk premium
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper develops a simple model of international lending, and calibrates it to assess quantitatively the effects of contingent IMF financial support on the risk premiums and the crisis probability. In the model, the country borrows in both short and long term; market (coordination) failure triggers a liquidity run and inefficient default; and the IMF lends unconditionally under a preferred creditor status. The model shows that IMF financial support can help prevent a liquidity crisis without causing investor moral hazard by helping to remove a distortion-effectively subsidizing ex post short-term investors (who run for the exit) at the expense of long-term investors (who are locked in). The resulting equilibrium is welfare enhancing as both the country's borrowing costs and the likelihood of a crisis are lower. The calibration exercises suggest that IMF-induced investor moral hazard-which occurs if the IMF lends at a subsidized rate-is unlikely to be a concern in practice, particularly if the country's economic fundamentals are strong and short-term debt is small.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund