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IMF-Supported Programs and Crisis Prevention

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  • Jun Il Kim
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    Abstract

    This paper presents an analytical framework for considering the role of IMF-supported programs in preventing crises, particularly capital account crises. The model builds upon the global games framework to establish a unique relationship between the crisis probability and the parameters of the program, which is assumed to be negotiated between the IMF and the member country, taking explicit account of each party''s interests. In the model, from the perspective of the borrowing country, IMF financing and policy adjustment are (perfect) substitutes inasmuch as they both contribute to the country''s liquidity and thus reduce the likelihood of a crisis. In equilibrium, however, IMF financing promotes stronger policies, implying that financing and adjustment are strong complements in crisis prevention. Conditionality plays a crucial role in sustaining the program, providing mutual assurances-to the member country that, if it undertakes the agreed policies, financing will indeed be forthcoming, and to the IMF that the country will implement the agreed policies as the IMF disburses its resources. The model helps explain how liquidity crises may come about, how IMF support can reduce the likelihood of a crisis by providing liquidity and sustaining stronger policies, and why the observed mix between financing and adjustment may vary across programs.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/156.

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    Length: 37
    Date of creation: 01 Jun 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/156

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    Related research

    Keywords: Conditionality; Emerging markets; Capital outflows; Fund role; member country; crisis prevention; current account balance; short-term debt; moral hazard; capital inflows; liquidity crisis; capital flows; net capital outflows; net capital; private capital; private capital flows; capital account crises; private financing; private capital inflows; capital movements; global capital markets; capital markets; current account deficits; short-term capital; liquid asset; perfect substitutes; current account surplus; political costs;

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    References

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    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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    1. Stephen Morris & Hyun Song Shin, 2003. "Catalytic Finance: When Does It Work?," Cowles Foundation Discussion Papers 1400, Cowles Foundation for Research in Economics, Yale University.
    2. Ales Bulir & Marianne Schulze-Gattas & Atish R. Ghosh & Alex Mourmouras & A. Javier Hamann & Timothy D. Lane, 2002. "IMF-Supported Programs in Capital Account Crises," IMF Occasional Papers 210, International Monetary Fund.
    3. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing: The Role of the IMF," NBER Working Papers 10834, National Bureau of Economic Research, Inc.
    4. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing," IMF Working Papers 04/197, International Monetary Fund.
    5. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
    6. repec:imf:imfpdp:9702 is not listed on IDEAS
    7. Fischer, Stanley, 1997. "Applied Economics in Action: IMF Programs," American Economic Review, American Economic Association, vol. 87(2), pages 23-27, May.
    8. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
    9. Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
    10. VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
    11. Charalambos Christofides & Atish R. Ghosh & Uma Ramakrishnan & Alun H. Thomas & Laura Papi & Juan Zalduendo & Jun Il Kim, 2005. "The Design of IMF-Supported Programs," IMF Occasional Papers 241, International Monetary Fund.
    12. Corsetti, Giancarlo & GuimarĂ£es, Bernardo & Roubini, Nouriel, 2004. "International Lending of Last Resort and Moral Hazard: A Model of the IMF's Catalytic Finance," CEPR Discussion Papers 4383, C.E.P.R. Discussion Papers.
    13. repec:rus:hseeco:123922 is not listed on IDEAS
    14. Curzio Giannini & Carlo Cottarelli, 2002. "Bedfellows, Hostages, or Perfect Strangers? Global Capital Markets and the Catalytic Effect of IMF Crisis Lending," IMF Working Papers 02/193, International Monetary Fund.
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    Cited by:
    1. 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.
    2. Jun Il Kim, 2007. "Unconditional IMF Financial Support and Investor Moral Hazard," IMF Working Papers 07/104, International Monetary Fund.
    3. Uma Ramakrishnan & Juan Zalduendo, 2006. "The Role of IMF Support in Crisis Prevention," IMF Working Papers 06/75, International Monetary Fund.

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