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On the Role and E ects of IMF Seniority

  • Diego Saravia

The paper presents a three period model that studies the e ects of IMF loans on borrowers’ and lenders’ welfare highlighting the fact that the IMF has both de jure and de facto seniority rights over private creditors. It is shown that an IMF intervention affects borrowers and lenders in different ways. Ex-post, once capital is installed and a liquidity shock occurs, an IMF intervention always makes the borrower country better off. The e ects on non-senior lenders depend on the size of the senior intervention and on the country’s solvency situation. IMF intervention makes existing creditors worse off when the country’s solvency situation is either very good or weak, but makes them better off when solvency is in an intermediate range, consistent with the nonlinearities found empirically in Mody and Saravia (2003). The possibility of future senior intervention a ects the optimal level of investment ex-ante, and it may be the case that the borrower country would be better off by committing today not to borrow from the IMF in the future. Since a country has incentives to borrow from the IMF once the shock occurs, this promise is not time consistent and an institution with clear rules about when to intervene will be welfare improving

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 131.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:131
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  1. 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.
  2. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows; Do IMF-Supported Programs Work As Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund.
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  12. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
  14. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  15. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  16. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  17. Detragiache, Enrica, 1994. "Sensible buybacks of sovereign debt," Journal of Development Economics, Elsevier, vol. 43(2), pages 317-333, April.
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  19. Berkovitch, Elazar & Kim, E Han, 1990. " Financial Contracting and Leverage Induced Over- and Under-Investment Incentives," Journal of Finance, American Finance Association, vol. 45(3), pages 765-94, July.
  20. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
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