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The IMF As a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises

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  • Lipscy, Phillip Y.
  • Lee, Haillie Na-Kyung

Abstract

A large literature has established that the International Monetary Fund (IMF) is heavily politicized. We argue that this politicization has important consequences for international reserve accumulation and financial crises. The IMF generates moral hazard asymmetrically, reducing the expected costs of risky lending and policies for states that are politically influential vis-Ã -vis the institution. Using a panel data set covering 1980 to 2010, we show that proxies for political influence over the IMF are associated with outcomes indicative of moral hazard: lower international reserves and more frequent financial crises. We support our causal claims by applying the synthetic control method to Taiwan, which was expelled from the IMF in 1980. Consistent with our predictions, Taiwan's expulsion led to a sharp increase in precautionary international reserves and exceptionally conservative financial policies.

Suggested Citation

  • Lipscy, Phillip Y. & Lee, Haillie Na-Kyung, 2019. "The IMF As a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises," International Organization, Cambridge University Press, vol. 73(1), pages 35-64, January.
    • Handle: RePEc:cup:intorg:v:73:y:2019:i:01:p:35-64_00
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    Cited by:

    1. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 2020. "Official sector lending during the euro area crisis," The Review of International Organizations, Springer, vol. 15(3), pages 667-705, July.
    2. Phillip Y. Lipscy, 2020. "How Do States Renegotiate International Institutions? Japan’s Renegotiation Diplomacy Since World War II," Global Policy, London School of Economics and Political Science, vol. 11(S3), pages 17-27, October.
    3. Bernhard Reinsberg & Thomas Stubbs & Alexander Kentikelenis, 2022. "Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets," Regulation & Governance, John Wiley & Sons, vol. 16(4), pages 1022-1041, October.
    4. Stephen Kaplan & Sujeong Shim, 2021. "Global Contagion and IMF Credit Cycles: A Lender of Partial Resort?," Working Papers 2021-13, The George Washington University, Institute for International Economic Policy.
    5. Stephen B. Kaplan & Sujeong Shim, 2020. "The IMF's Financial Catch 22: Global Banker or Lender of Last Resort?," Working Papers 2020-18, The George Washington University, Institute for International Economic Policy.
    6. Kern, Andreas & Nosrati, Elias & Reinsberg, Bernhard & Sevinc, Dilek, 2023. "Crash for cash: Offshore financial destinations and IMF programs," European Journal of Political Economy, Elsevier, vol. 78(C).

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