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A model of the IMF as a coinsurance arrangement

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  • Ralph Chami

    (International Monetary Fund (IMF))

  • Sunil Sharma

    (International Monetary Fund (IMF))

  • Ilhyock Shim

Abstract

The paper develops a model of an IMF-like coinsurance arrangement among member countries. First, it shows that a coinsurance arrangement among countries can, in principle, play a useful role in helping countries bear the risks involved in developing their economies and becoming part of the global financial system. Second, the operation of the coinsurance arrangement is examined under different loan contracts offered by the IMF. The analysis suggests that, if the IMF's objective is to safeguard its resources and be concerned about the welfare of the borrower, an ex ante loan contract (that is a contract agreed to before problems arise) is more likely to create the right incentives - induce higher effort by member countries to avoid and overcome crises - than an ex-post loan contract (that is a contract made after problems arise). Such ex ante contracts highlight the need for precommitment to contend with the Samaritan's dilemma and time inconsistency. It also shows that state-contingent repayment schemes are needed to deal with King Lear's dilemma.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 170.

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Length: 41 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:bis:biswps:170

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Keywords: IMF; coinsurance arrangement; conditionality; moral hazard; Samaritan's dilemma; King Lear's dilemma;

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References

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Citations

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Cited by:
  1. Jeromin Zettelmeyer & Jonathan David Ostry & Olivier Jeanne, 2008. "A Theory of International Crisis Lending and IMF Conditionality," IMF Working Papers, International Monetary Fund 08/236, International Monetary Fund.
  2. Suman S. Basu & Ran Bi & Prakash Kannan, 2010. "Regional reserve pooling arrangements," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Oct.
  3. Irwin, Gregor & Penalver, Adrian & Salmon, Chris & Taylor, Ashley, 2008. "Dealing with country diversity: challenges for the IMF credit union model," Bank of England working papers, Bank of England 349, Bank of England.
  4. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters, National Bureau of Economic Research, Inc, in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
  5. Barry Eichengreen, 2007. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," Open Economies Review, Springer, Springer, vol. 18(1), pages 27-52, February.
  6. Anna Ivanova, 2006. "Outcomes-Based Conditionality," IMF Working Papers, International Monetary Fund 06/128, International Monetary Fund.

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