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Basic analytics of multilateral lending and surveillance

  • Hagen, Rune Jansen

I analyse the role of multilateral financial institutions in a world of global capital markets assuming that they have an informational advantage over private lenders in the market for sovereign debt. I show that the adverse selection problem in this market may be solved through certification if the multilateral agency does not care too much about borrower country welfare. However, with lending the private information of the agency will be revealed whatever its weighting of borrower welfare vs. private lenders' profits. Multilateral lending on concessional terms also alleviates the moral hazard problem -- that investment in creditworthy borrowers is reduced as private lenders seek to avoid ex post default by constraining credit.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 79 (2009)
Issue (Month): 1 (September)
Pages: 126-136

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Handle: RePEc:eee:inecon:v:79:y:2009:i:1:p:126-136
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  13. Graham Bird & Dane Rowlands, 1997. "The Catalytic Effect of Lending by the International Financial Institutions," The World Economy, Wiley Blackwell, vol. 20(7), pages 967-991, November.
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  17. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
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