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Liquidity protection versus moral hazard: the role of the IMF

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  • Powell, Andrew
  • Arozamena, Leandro

Abstract

This paper develops a simple game between the IMF a county and a set of atomistic private investors. The model is motivated by the case of Argentina. Under reasonable assumptions, the one shot game has no Nash equilibrium in pure strategies. Considering an equilibrium in mixed strategies, conditions are derived on whether the IMF should exist. A “cooperative first best” may be supported in a repeated game by a “minimum punishment strategy” that may be optimal but may break down if the probability of insolvency rises. This implies that countries are likely to deviate in bad times placing the IMF in an “impossible position”. It is suggested that the international financial architecture (IFA) remains incomplete.
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  • Powell, Andrew & Arozamena, Leandro, 2003. "Liquidity protection versus moral hazard: the role of the IMF," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1041-1063, December.
  • Handle: RePEc:eee:jimfin:v:22:y:2003:i:7:p:1041-1063
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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    2. Andy Haldane, Bank of England & Mark Kruger, Bank of Canada, 2002. "The Resolution of International Financial Crises: Private Finance and Public Funds," Bank of Canada Review, Bank of Canada, vol. 2001(Winter), pages 3-13.
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    7. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, pages 161-177.
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    10. Michael P. Dooley & Sujata Verma, 2003. "Rescue Packages and Output Losses Following Crises," NBER Chapters,in: Managing Currency Crises in Emerging Markets, pages 125-186 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Eduardo Fernández-Arias & Andrew Powell & Alessandro Rebucci, 2009. "The Multilateral Response to the Global Crisis: Rationale, Modalities, and Feasibility," IDB Publications (Working Papers) 1653, Inter-American Development Bank.
    2. Cavallo, Eduardo & Powell, Andrew & Pedemonte, Mathieu & Tavella, Pilar, 2015. "A new taxonomy of Sudden Stops: Which Sudden Stops should countries be most concerned about?," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 47-70.
    3. Noy, Ilan, 2008. "Sovereign default risk, the IMF and creditor moral hazard," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 64-78, February.
    4. Ilan Noy, 2004. "Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach," Working Papers 200402, University of Hawaii at Manoa, Department of Economics.
    5. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
    6. Cavallo, Eduardo A. & Fernández-Arias, Eduardo & Powell, Andrew, 2014. "Is the Euro-zone on the Mend? Latin American examples to analyze the Euro question," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 243-257.
    7. Scheubel, Beatrice & Herrala, Risto & Stracca, Livio, 2016. "What do we know about the global financial safety net? Data, rationale and possible evolution," Annual Conference 2016 (Augsburg): Demographic Change 145676, Verein für Socialpolitik / German Economic Association.
    8. Ugo Panizza, 2013. "Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion," IHEID Working Papers 03-2013, Economics Section, The Graduate Institute of International Studies.
    9. Marta Rubio-Codina & Orazio Attanasio & Costas Meghir & Natalia Varela & Sally Grantham-McGregor, 2015. "The Socioeconomic Gradient of Child Development: Cross-Sectional Evidence from Children 6–42 Months in Bogota," Journal of Human Resources, University of Wisconsin Press, vol. 50(2), pages 464-483.
    10. Martin Steinwand & Randall Stone, 2008. "The International Monetary Fund: A review of the recent evidence," The Review of International Organizations, Springer, vol. 3(2), pages 123-149, June.

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