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A Theory of International Crisis Lending and IMF Conditionality

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  • Jeromin Zettelmeyer
  • Jonathan David Ostry
  • Olivier Jeanne

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/236.

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Length: 33
Date of creation: 01 Oct 2008
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Handle: RePEc:imf:imfwpa:08/236

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Keywords: International Monetary Fund; Crisis prevention; Fund role; Moral hazard; Spillovers; conditionality; crisis lending; ante conditionality; ex ante conditionality; contagion; crisis resolution; ex post conditionality; pre-crisis; financial crises; conditional lending; crisis countries; debt overhang; financial crisis; prudential regulation; ex ante ? conditionality; macroeconomic policies; crisis country; capital adequacy; banking crises; capital account liberalization; currency crisis; imf supported adjustment programs; adjustment programs; balance of payments crisis; international crisis; international financial crises; capital account crisis; international crisis lending; ante ? conditionality; crisis probability; payments crisis; debt structure;

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References

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Citations

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Cited by:
  1. Eduardo Fernandez-Arias & Andrew Powell & Alessandro Rebucci, 2009. "The Multilateral Response to the Global Crisis: Rationale, Modalities, and Feasibility," Research Department Publications, Inter-American Development Bank, Research Department 4629, Inter-American Development Bank, Research Department.
  2. Fratzscher, Marcel & Reynaud, Julien, 2011. "IMF surveillance and financial markets--A political economy analysis," European Journal of Political Economy, Elsevier, Elsevier, vol. 27(3), pages 405-422, September.
  3. Daniel Kapp, 2012. "The optimal size of the European Stability Mechanism: A cost-benefit analysis," DNB Working Papers, Netherlands Central Bank, Research Department 349, Netherlands Central Bank, Research Department.

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