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On the role and effects of IMF seniority

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  • Saravia, Diego

Abstract

We analyze the IMF as a lender to countries in financial distress highlighting the fact that it is a senior creditor. An advantage of delegating senior lending in a single institution rather than on competitive markets is that it would be able to reach the socially optimal solution. This would require the IMF not to intervene when the crisis is severe enough. However, a commitment device might be needed to achieve the socially optimal solution. If IMF lending were done for all shocks, the country would be always ex-post better off but lenders would be worse off when the country situation is either good or weak, which is consistent with empirical evidence. Anticipation of senior lending might make the country better off by preventing inefficient liquidation. However it might actually hurt the country ex-ante and too much rescuing in the future could lead to too little lending in the present which is contrary to the moral hazard critique.

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Bibliographic Info

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

Volume (Year): 29 (2010)
Issue (Month): 6 (October)
Pages: 1024-1044

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:6:p:1024-1044

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

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Keywords: Seniority IMF Sovereign debt Ex-ante and ex-post welfare effects;

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References

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  1. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers.
  2. Charles W. Calomiris, 1998. "The IMF's Imprudent Role As Lender of Last Resort," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), pages 275-294, Winter.
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Citations

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Cited by:
  1. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
  2. Chamley, Christophe & Pinto, Brian, 2012. "Sovereign bailouts and senior loans," Policy Research Working Paper Series 6181, The World Bank.
  3. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.
  4. Carlos Eduardo Gonçalves & Bernardo Guimarães, 2012. "Sovereign default risk and commitment for fiscal adjustment," Working Papers, Department of Economics 2012_23, University of São Paulo (FEA-USP).
  5. Diego Saravia, 2013. "Vulnerability, Crisis and Debt Maturity: Do IMF Interventions Shorten the Length of Borrowing?," Working Papers Central Bank of Chile 697, Central Bank of Chile.
  6. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Debt dilution and seniority in a model of defaultable sovereign debt," Working Papers 12-14, Federal Reserve Bank of Philadelphia.
  7. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," Working Papers 92, Institute of Empirical Economic Research.
  8. Leonardo Martinez & Juan Carlos Hatchondo & Cesar Sosa Padilla, 2011. "Debt Dilution and Sovereign Default Risk," IMF Working Papers 11/70, International Monetary Fund.
  9. Christophe Chamley & Brian Pinto, 2012. "Sovereign Bailouts and Senior Loans," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 269-291 National Bureau of Economic Research, Inc.
  10. Jorra, Markus, 2012. "The effect of IMF lending on the probability of sovereign debt crises," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 709-725.
  11. Ran Bi, 2006. "Debt Dilution and Maturity Structure of Sovereign Bonds," 2006 Meeting Papers 652, Society for Economic Dynamics.

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