International Financial Contagion and the Fund: A Theoretical Framework

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International Financial Contagion and the Fund: A Theoretical Framework

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Peter B. Clark
Haizhou Huang

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Haizhou Huang Dr.

Abstract

We provide a model of contagion where countries borrow or lend for consumption smoothing at the market interest rate or a lower IMF rate. Highly indebted countries hit by large negative shocks to output will default. The resulting reduction in loanable funds raises interest rates, increases the vulnerability of other indebted countries, and can generate further rounds of defaults. In this environment the IMF can limit default and internalize the externality generated by contagion through its lending with conditionality. We characterize the IMF's optimal lending decision in mitigating the loss in world consumption.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/137.

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Length: 31 pages
Date of creation: 04 Oct 2001
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Handle: RePEc:imf:imfwpa:01/137

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
- Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University. [Downloadable!]
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Other versions:
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Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Olivier Jeanne & Jonathan David Ostry & Jeromin Zettelmeyer, 2008. "A Theory of International Crisis Lending and IMF Conditionality," IMF Working Papers 08/236, International Monetary Fund. [Downloadable!]
Other versions:
- Jeanne, Olivier & Ostry, Jonathan D & Zettelmeyer, Jeronimo, 2008. "A Theory of International Crisis Lending and IMF Conditionality," CEPR Discussion Papers 7022, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Peter Clark & Haizhou Huang, 2006. "International Financial Contagion and the Fund â€”A Theoretical Framework," Open Economies Review, Springer, vol. 17(4), pages 399-422, December. [Downloadable!] (restricted)

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