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IMF lending and creditor moral hazard

Existing empirical evidence on the effects of IMF intervention on debtor and creditor incentives - so-called moral hazard - is mixed. A new test of creditor moral hazard is developed, which uses some new data and some more stringent identifying restrictions. The test examines the response of the market valuation of UK banks to IMF loan packages. It finds a significant positive response for UK banks, with abnormal returns of over 1% in a number of cases. These excess returns are greater, the larger is the IMF package and the larger is the size of the creditor banks' emerging market portfolio. This effect is significant even once the potentially welfare-enhancing effect of IMF loans in offsetting overpricing problems in international capital markets is controlled for. In short, concrete evidence is found of creditor-side moral hazard associated with IMF support.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/WP216.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 216.

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Date of creation: May 2004
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Handle: RePEc:boe:boeewp:216
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  1. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  2. Sayantan Ghosal & Marcus Miller, 2003. "Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures," Economic Journal, Royal Economic Society, vol. 113(487), pages 276-304, 04.
  3. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
  4. Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? theoretical considerations," Economic Journal, Royal Economic Society, vol. 114(494), pages C130-C148, 03.
  5. Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  6. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  7. Brealey, Richard, 1999. "The Asian Crisis: Lessons for Crisis Management and Prevention," International Finance, Wiley Blackwell, vol. 2(2), pages 249-72, July.
  8. Prasanna Gai & Ashley Taylor, 2004. "International financial rescues and debtor-country moral hazard," Bank of England working papers 217, Bank of England.
  9. Richard Brealey, 1999. "The Asian Crisis: Lessons For Crisis Management And Prevention," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 111-124.
  10. Morris, Stephen & Shin, Hyun Song, 1999. "Risk Management with Interdependent Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 52-62, Autumn.
  11. 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.).
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