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On the Role and Effects of IMF Seniority

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Author Info
Diego Saravia () (Instituto de Economía. Pontificia Universidad Católica de Chile.)

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Abstract

We analyze the IMF as a lender to countries in financial distress highlighting the fact that it is a senior creditor. An advantage of delegating senior lending in a single institution rather than on competitive markets is that it would be able to reach the socially optimal solution. This would require the IMF not to intervene when the crisis is severe enough. However, a commitment device might be needed to achieve the socially optimal solution. If IMF lending were done for all shocks, the country would be always ex-post better off but lenders would be worse off when the country situation is either good or weak, which is consistent with empirical evidence. Anticipation of senior lending might make the country better off by preventing inefficient liquidation. However it might actually hurt the country ex-ante and too much rescuing in the future could lead to too little lending in the present which is contrary to the moral hazard critique.

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Publisher Info
Paper provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 317.

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Date of creation: 2007
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Handle: RePEc:ioe:doctra:317

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Related research
Keywords: Seniority Sovereign Debt IMF ex-ante ex-post welfare effects.

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
E00 - Macroeconomics and Monetary Economics - - General - - - General

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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.:
  1. Ashoka Mody & Diego Saravia, 2003. "Catalyzing Capital Flows: Do IMF-Supported Programs Work as Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
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  3. Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March. [Downloadable!] (restricted)
  5. Anne O. Krueger, 2000. "Conflicting Demands on the International Monetary Fund," American Economic Review, American Economic Association, vol. 90(2), pages 38-42, May. [Downloadable!] (restricted)
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  1. Ashoka Mody & Diego Saravia, 2005. "Catalyzing Private Capital Flows: Do IMF Programs Work as Commitment Devices?," Documentos de Trabajo 280, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
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