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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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References

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  1. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  2. Michael Kremer & Seema Jayachandran, 2002. "Odious Debt," NBER Working Papers 8953, National Bureau of Economic Research, Inc.
  3. Bengt Holmstrom & Jean Tirole, 1996. "Private and Public Supply of Liquidity," NBER Working Papers 5817, National Bureau of Economic Research, Inc.
  4. 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.).
  5. Edda Zoli, 2004. "Credit Rationing in Emerging Economies' Access to Global Capital Markets," IMF Working Papers 04/70, 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.
  7. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  8. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  9. Michael Mussa, 1999. "Reforming the International Financial Architecture: Limiting Moral Hazard and Containing Real Hazard," RBA Annual Conference Volume, in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia.
  10. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
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Cited by:
  1. Jong-Wha Lee & Kwanho Shin, 2005. "IMF Bailouts and Moral Hazard," International Finance 0501005, EconWPA.
  2. Raghuram G. Rajan & Ioannis Tokatlidis, 2005. "Dollar Shortages and Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  3. Boz, Emine, 2011. "Sovereign default, private sector creditors, and the IFIs," Journal of International Economics, Elsevier, vol. 83(1), pages 70-82, January.
  4. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  5. Noy, Ilan, 2008. "Sovereign default risk, the IMF and creditor moral hazard," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 64-78, February.
  6. Leszek Balcerowicz, 2010. "Sovereign Bankruptcy in the European Union in the Comparative Perspective," Working Paper Series WP10-18, Peterson Institute for International Economics.

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