IMF Lending, Maturity of International Debt and Moral Hazard
International Monetary Fund lending continues to be criticized for possibly generating moral hazard in international financial markets. The empirical examination of this issue has focused exclusively on the potential distortions in the pricing of credit, in the form of lower spreads. To date no research has been conducted on the potential impact of IMF lending on the maturity composition of borrowing. This is a major omission because of the established relationship in the financial crises literature that shorter debt maturity increases the probability of financial crises. This paper contributes to the debate on whether IMF lending generates moral hazard in international financial markets in three respects. First, we examine for a sample of emerging and developing market economies whether after controlling for every thing else IMF lending leads to a shift in the composition of foreign debt towards riskier long-term debt. Second, we examine whether different IMF programs, other things the same, have different or similar impacts on the maturity composition of foreign debt. Third, we make an effort to account for the signaling and commitment effects of IMF lending. Using panel data for 71 emerging and developing countries for the period of 1992-97, we find that the impact of IMF programs is in general to reduce short-term debt flows relative to total debt flows, especially in the post Mexican crisis period. This suggests that IMF lending generates moral hazard in international financial markets from the perspective of the maturity composition of foreign debt. We also find that not all types of IMF lending generate moral hazard. Finally, we find that while there are significant signaling effects of IMF lending on the maturity of international debt, the
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