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The Mussa Theorem

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Author Info

  • Olivier Jeanne
  • Jeromin Zettelmeyer

Abstract

Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999, 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/192.

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Length: 25
Date of creation: 01 Oct 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/192

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Related research

Keywords: International Monetary Fund; Moral hazard; Economic models; capital flows; capital inflows; international capital markets; capital markets; international capital; indexed bonds; international financial architecture; international finance; credit rationing; financial system; private investors; bonds; capital movements; credit market; foreign capital; global capital markets; liquidity support; liquidity crises; short-term capital; international financial markets; financial market; financial markets; money market; financial sector; financial instability; international financial system; financial institutions; money market interest; capital account crises; financial stability; money market interest rates;

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References

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  1. Michael Mussa, 1999. "Reforming the International Financial Architecture: Limiting Moral Hazard and Containing Real Hazard," RBA Annual Conference Volume, in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia.
  2. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  3. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  4. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
  5. Olivier Jeanne, 2009. "Debt Maturity and the International Financial Architecture," American Economic Review, American Economic Association, vol. 99(5), pages 2135-48, December.
  6. Seema Jayachandran & Michael Kremer, 2006. "Odious Debt," American Economic Review, American Economic Association, vol. 96(1), pages 82-92, March.
  7. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
  8. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  9. Edda Zoli, 2004. "Credit Rationing in Emerging Economies' Access to Global Capital Markets," IMF Working Papers 04/70, International Monetary Fund.
  10. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR & CES & MSH, vol. 19(38), pages 165-216, 04.
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Citations

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Cited by:
  1. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
  2. Boz, Emine, 2011. "Sovereign default, private sector creditors, and the IFIs," Journal of International Economics, Elsevier, vol. 83(1), pages 70-82, January.
  3. Leszek Balcerowicz, 2010. "Sovereign Bankruptcy in the European Union in the Comparative Perspective," Working Paper Series WP10-18, Peterson Institute for International Economics.
  4. Raghuram G. Rajan, 2004. "Dollar Shortages and Crises," NBER Working Papers 10845, National Bureau of Economic Research, Inc.

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