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IMF bailouts and moral hazard

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  • Lee, Jong-Wha
  • Shin, Kwanho

Abstract

This paper empirically investigates the extent of investor moral hazard associated with IMF bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of IMF bailouts of countries undergoing financial crisis. By allowing the probability of being bailed out by the IMF to differ across countries, we find that the expectations of IMF lending attenuate the relationship between spreads and country fundamentals, consistent with the presence of IMF moral hazard. Our findings indicate that this effect persists even after the non-bailout of Russian crisis in August 1998.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 5 (September)
Pages: 816-830

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:816-830

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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  1. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
  2. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004.
  3. Yung Chul Park & Yunjong Wang, 2002. "What Kind of International Financial Architecture for an Integrated World Economy?," Asian Economic Papers, MIT Press, vol. 1(1), pages 91-128.
  4. Ashley Taylor & Prasanna Gai, 2004. "International financial rescues and debtor-country moral hazard," Econometric Society 2004 Far Eastern Meetings 561, Econometric Society.
  5. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  6. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  7. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  8. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
  9. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  10. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March.
  11. Olivier Jeanne & Jeromin Zettelmeyer, 2004. "The Mussa Theorem: and Other Results on IMF Induced Moral Hazard," IMF Working Papers 04/192, International Monetary Fund.
  12. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  13. Ashoka Mody & Diego Saravia, 2005. "Catalyzing Private Capital Flows: Do IMF Programs Work as Commitment Devices?," Documentos de Trabajo 280, Instituto de Economia. Pontificia Universidad Católica de Chile..
  14. Graham Bird & Dane Rowlands, 2001. "IMF lending: how is it affected by economic, political and institutional factors?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 4(3), pages 243-270.
  15. Robert J. Barro & Jong-Wha Lee, 2002. "IMF Programs: Who is Chosen and What Are the Effects?," NBER Working Papers 8951, National Bureau of Economic Research, Inc.
  16. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
  17. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR & CES & MSH, vol. 16(33), pages 407-432, October.
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Citations

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Cited by:
  1. Heppke-Falk, Kirsten H. & Wolff, Guntram B., 2007. "Moral hazard and bail-out in fiscal federations: evidence for the German Länder," Discussion Paper Series 1: Economic Studies 2007,07, Deutsche Bundesbank, Research Centre.
  2. Oscar Bernal Diaz & Kim Oosterlinck & Ariane Szafarz, 2009. "Observing bailout expectations during a total eclipse of the sun," DULBEA Working Papers 09-01.RS, ULB -- Universite Libre de Bruxelles.
  3. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
  4. Van Hecke, Annelore, 2013. "Vertical debt spillovers in EMU countries," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 468-492.

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