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A Theory of International Crisis Lending and IMF Conditionality

  • Jeanne, Olivier
  • Ostry, Jonathan D
  • Zettelmeyer, Jeromin

We present a framework that clarifies the financial role of the IMF, the rationale for conditionality, and the conditions under which IMF-induced moral hazard can arise. In the model, traditional conditionality commits country authorities to undertake crisis resolution efforts, facilitating the return of private capital, and ensuring repayment to the IMF. Nonetheless, moral hazard can arise if there are crisis externalities across countries (contagion) or if country authorities discount crisis costs too much relative to the national social optimum, or both. Moral hazard can be avoided by making IMF lending conditional on crisis prevention efforts - "ex ante" conditionality.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7022.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7022
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