The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)
AbstractUsing 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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Volume (Year): 52 (2005)
Issue (Month): si ()
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Other versions of this item:
- Olivier Jeanne & Jeromin Zettelmeyer, 2004. "The Mussa Theorem: and Other Results on IMF Induced Moral Hazard," IMF Working Papers 04/192, International Monetary Fund.
- 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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