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A model of the IMF as a coinsurance arrangement

Author

Listed:
  • Ralph Chami

    (International Monetary Fund (IMF))

  • Sunil Sharma

    (International Monetary Fund (IMF))

  • Ilhyock Shim

Abstract

The paper develops a model of an IMF-like coinsurance arrangement among member countries. First, it shows that a coinsurance arrangement among countries can, in principle, play a useful role in helping countries bear the risks involved in developing their economies and becoming part of the global financial system. Second, the operation of the coinsurance arrangement is examined under different loan contracts offered by the IMF. The analysis suggests that, if the IMF's objective is to safeguard its resources and be concerned about the welfare of the borrower, an ex ante loan contract (that is a contract agreed to before problems arise) is more likely to create the right incentives - induce higher effort by member countries to avoid and overcome crises - than an ex-post loan contract (that is a contract made after problems arise). Such ex ante contracts highlight the need for precommitment to contend with the Samaritan's dilemma and time inconsistency. It also shows that state-contingent repayment schemes are needed to deal with King Lear's dilemma.

Suggested Citation

  • Ralph Chami & Sunil Sharma & Ilhyock Shim, 2005. "A model of the IMF as a coinsurance arrangement," BIS Working Papers 170, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:170
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Irwin, Gregor & Penalver, Adrian & Salmon, Chris & Taylor, Ashley, 2008. "Dealing with country diversity: challenges for the IMF credit union model," Bank of England working papers 349, Bank of England.
    2. Jeanne, Olivier & Ostry, Jonathan D & Zettelmeyer, Jeromin, 2008. "A Theory of International Crisis Lending and IMF Conditionality," CEPR Discussion Papers 7022, C.E.P.R. Discussion Papers.
    3. Barry Eichengreen, 2007. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," Open Economies Review, Springer, vol. 18(1), pages 27-52, February.
    4. Suman Basu & Ran Bi & Prakash Kannan, 2010. "Regional reserve pooling arrangements," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.
    5. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters,in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    6. Anna Ivanova, 2006. "Outcomes-Based Conditionality: Its Role and Optimal Design," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1-4.

    More about this item

    Keywords

    IMF; coinsurance arrangement; conditionality; moral hazard; Samaritan's dilemma; King Lear's dilemma;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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