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A Theory of International Crisis Lending and IMF Conditionality

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  • Jeanne, Olivier
  • Ostry, Jonathan D
  • Zettelmeyer, Jeronimo

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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Cited by:
  1. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers 349, Netherlands Central Bank, Research Department.
  2. Eduardo Fernández-Arias & Andrew Powell & Alessandro Rebucci, 2009. "The Multilateral Response to the Global Crisis: Rationale, Modalities, and Feasibility," IDB Publications 6770, Inter-American Development Bank.
  3. Fratzscher, Marcel & Reynaud, Julien, 2011. "IMF surveillance and financial markets--A political economy analysis," European Journal of Political Economy, Elsevier, vol. 27(3), pages 405-422, September.

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