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IMF Lending, Maturity of International Debt and Moral Hazard

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Abstract

International Monetary Fund lending continues to be criticized for possibly generating moral hazard in international financial markets. The empirical examination of this issue has focused exclusively on the potential distortions in the pricing of credit, in the form of lower spreads. To date no research has been conducted on the potential impact of IMF lending on the maturity composition of borrowing. This is a major omission because of the established relationship in the financial crises literature that shorter debt maturity increases the probability of financial crises. This paper contributes to the debate on whether IMF lending generates moral hazard in international financial markets in three respects. First, we examine for a sample of emerging and developing market economies whether after controlling for every thing else IMF lending leads to a shift in the composition of foreign debt towards riskier long-term debt. Second, we examine whether different IMF programs, other things the same, have different or similar impacts on the maturity composition of foreign debt. Third, we make an effort to account for the signaling and commitment effects of IMF lending. Using panel data for 71 emerging and developing countries for the period of 1992-97, we find that the impact of IMF programs is in general to reduce short-term debt flows relative to total debt flows, especially in the post Mexican crisis period. This suggests that IMF lending generates moral hazard in international financial markets from the perspective of the maturity composition of foreign debt. We also find that not all types of IMF lending generate moral hazard. Finally, we find that while there are significant signaling effects of IMF lending on the maturity of international debt, the

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Bibliographic Info

Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0301.

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Length: 30 pages
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:ays:ispwps:paper0301

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Keywords: IMF Lending; Debt; Moral Hazard;

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References

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Cited by:
  1. Oscar Bernal Diaz & Kim Oosterlinck & Ariane Szafarz, 2008. "Observing bailout expectations during a total eclipse of the sun," Working Papers CEB 08-015.RS, ULB -- Universite Libre de Bruxelles.
  2. Diego Saravia, 2010. "Vulnerability, Crisis and Debt Maturity: do IMF Interventions Shorten the Length of Borrowing?," Working Papers Central Bank of Chile 600, Central Bank of Chile.
  3. Aitor Erce, 2012. "Does the IMF´s official support affect sovereign bond maturities?," Banco de Espa�a Working Papers 1231, Banco de Espa�a.
  4. Aitor Erce, 2012. "Does the IMF's official support affect sovereign bonds maturities?," Globalization and Monetary Policy Institute Working Paper 128, Federal Reserve Bank of Dallas.
  5. Yilmaz AKYüZ, 2005. "Reforming The Imf: Back To The Drawing Board," G-24 Discussion Papers 38, United Nations Conference on Trade and Development.

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