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IMF bailouts and moral hazard

  • Lee, Jong-Wha
  • Shin, Kwanho

This paper empirically investigates the extent of investor moral hazard associated with IMF bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of IMF bailouts of countries undergoing financial crisis. By allowing the probability of being bailed out by the IMF to differ across countries, we find that the expectations of IMF lending attenuate the relationship between spreads and country fundamentals, consistent with the presence of IMF moral hazard. Our findings indicate that this effect persists even after the non-bailout of Russian crisis in August 1998.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 5 (September)
Pages: 816-830

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:816-830
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series 563, CESifo Group Munich.
  2. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March.
  3. Steven B. Kamin, 2002. "Identifying the role of moral hazard in international financial markets," International Finance Discussion Papers 736, Board of Governors of the Federal Reserve System (U.S.).
  4. Robert J Barro & Jong-Wha Lee, 2003. "IMF Programs: Who Is Chosen and What Are the Effects?," Departmental Working Papers 2003-09, The Australian National University, Arndt-Corden Department of Economics.
  5. Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor-country moral hazard," Bank of England working papers 217, Bank of England.
  6. Barry J. Eichengreen, 1999. "Toward a New International Financial Architecture: A Practical Post-Asia Agenda," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 51.
  7. Olivier Jeanne & Jeromin Zettelmeyer, 2004. "The Mussa Theorem; and Other Resultson IMF Induced Moral Hazard," IMF Working Papers 04/192, International Monetary Fund.
  8. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  9. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  10. Yung Chul Park & Yunjong Wang, 2002. "What Kind of International Financial Architecture for an Integrated World Economy?," Asian Economic Papers, MIT Press, vol. 1(1), pages 91-128.
  11. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004.
  12. Graham Bird & Dane Rowlands, 2001. "IMF lending: how is it affected by economic, political and institutional factors?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 4(3), pages 243-270.
  13. Ashoka Mody & Diego Saravia, 2005. "Catalyzing Private Capital Flows: Do IMF Programs Work as Commitment Devices?," Documentos de Trabajo 280, Instituto de Economia. Pontificia Universidad Católica de Chile..
  14. Barry Eichengreen & Ashoka Mody, 2004. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, Royal Economic Society, vol. 114(495), pages 247-264, 04.
  15. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  16. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
  17. Dell'Ariccia, Giovanni & Schnabel, Isabel & Zettelmeyer, Jeromin, 2006. "How Do Official Bailouts Affect the Risk of Investing in Emerging Markets?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1689-1714, October.
  18. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
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