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A Theory of International Crisis Lending and IMF Conditionality
Author:
Mr. Jeromin Zettelmeyer
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,
Mr. Jonathan David Ostry
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, and
Mr. Olivier D Jeanne
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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 236
Language:
English
Publication Date:
01 Oct 2008
DOI:
https://doi.org/10.5089/9781451870947.001
ISBN:
9781451870947
ISSN:
1018-5941
Pages:
33
Keywords:
WP; IMF lending; IMF crisis lending; substitution effect
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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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund