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The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)

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Author Info
Olivier Jeanne (International Monetary Fund)
Jeromin Zettelmeyer (International Monetary Fund)

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Abstract

Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999 and 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem. Copyright 2005, International Monetary Fund

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Article provided by International Monetary Fund in its journal IMF Staff Papers.

Volume (Year): 52 (2005)
Issue (Month): si ()
Pages: 5
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Handle: RePEc:imf:imfstp:v:52:y:2005:i:si:p:5

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Tito Cordella & Eduardo Levy Yeyati, 2004. "Country Insurance," Business School Working Papers countryinsurance, Universidad Torcuato Di Tella. [Downloadable!]
    Other versions:
  2. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR, CES, MSH, vol. 19(38), pages 165-216, 04. [Downloadable!] (restricted)
  3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  4. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004. [Downloadable!]
  5. Timothy D. Lane & Steven Phillips, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  6. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Edda Zoli, 2004. "Credit Rationing in Emerging Economies' Access to Global Capital Markets," IMF Working Papers 04/70, International Monetary Fund. [Downloadable!]
  8. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund. [Downloadable!]
  9. 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.). [Downloadable!]
  10. Isabel Schnabel & Giovanni Dell'Ariccia & Jeromin Zettelmeyer, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund. [Downloadable!]
  11. Michael Kremer & Seema Jayachandran, 2002. "Odious Debt," NBER Working Papers 8953, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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