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A Theory of International Crisis Lending and IMF Conditionality

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Author Info
Jeanne, Olivier
Ostry, Jonathan D
Zettelmeyer, Jeronimo

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Abstract

We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to the IMF. Nonetheless, moral hazard can arise if there are crisis externalities across countries (contagion) or if country authorities discount crisis costs too much relative to the national social optimum, or both. Moral hazard can be avoided by making IMF lending conditional on crisis prevention efforts - "ex ante" conditionality.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7022.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7022

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Find related papers by JEL classification:
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
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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  1. Ashoka Mody & Diego Saravia, 2003. "Catalyzing Capital Flows: Do IMF-Supported Programs Work as Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund. [Downloadable!]
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    Other versions:
  4. Nadeem Ul Haque & Mohsin S. Khan, 1998. "Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence," IMF Working Papers 98/169, International Monetary Fund.
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    Other versions:
  7. Jonathan David Ostry & Jeromin Zettelmeyer, 2005. "Strengthening IMF Crisis Prevention," IMF Working Papers 05/206, International Monetary Fund. [Downloadable!]
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    Other versions:
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    Other versions:
  20. Weithoner, Thomas, 2006. "How can IMF policy eliminate country moral hazard and account for externalities?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1257-1276, December. [Downloadable!] (restricted)
  21. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September. [Downloadable!] (restricted)
    Other versions:
  22. S. Nuri Erbas, 2003. "IMF Conditionality and Program Ownership: A Case for Streamlined Conditionality," IMF Working Papers 03/98, International Monetary Fund. [Downloadable!]
  23. Carlos de Resende, 2007. "IMF-Supported Adjustment Programs: Welfare Implications and the Catalytic Effect," Working Papers 07-22, Bank of Canada. [Downloadable!]
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    Other versions:
  25. Wolfgang Mayer & Alex Mourmouras, 2002. "Vested Interests in a Positive Theory of IFI Conditionality," IMF Working Papers 02/73, International Monetary Fund.
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