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

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  • Olivier Jeanne

    (International Monetary Fund)

  • Jeromin Zettelmeyer

    (International Monetary Fund)

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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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 52 (2005)
Issue (Month): si ()
Pages: 5

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Handle: RePEc:pal:imfstp:v:52:y:2005:i:si:p:5

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Cited by:
  1. Jong-Wha Lee & Kwanho Shin, 2005. "IMF Bailouts and Moral Hazard," International Finance, EconWPA 0501005, EconWPA.
  2. Noy, Ilan, 2008. "Sovereign default risk, the IMF and creditor moral hazard," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 18(1), pages 64-78, February.

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