IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/07-104.html
   My bibliography  Save this paper

Unconditional IMF Financial Support and Investor Moral Hazard

Author

Listed:
  • Jun I Kim

Abstract

This paper develops a simple model of international lending, and calibrates it to assess quantitatively the effects of contingent IMF financial support on the risk premiums and the crisis probability. In the model, the country borrows in both short and long term; market (coordination) failure triggers a liquidity run and inefficient default; and the IMF lends unconditionally under a preferred creditor status. The model shows that IMF financial support can help prevent a liquidity crisis without causing investor moral hazard by helping to remove a distortion-effectively subsidizing ex post short-term investors (who run for the exit) at the expense of long-term investors (who are locked in). The resulting equilibrium is welfare enhancing as both the country's borrowing costs and the likelihood of a crisis are lower. The calibration exercises suggest that IMF-induced investor moral hazard-which occurs if the IMF lends at a subsidized rate-is unlikely to be a concern in practice, particularly if the country's economic fundamentals are strong and short-term debt is small.

Suggested Citation

  • Jun I Kim, 2007. "Unconditional IMF Financial Support and Investor Moral Hazard," IMF Working Papers 07/104, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/104
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=20667
    Download Restriction: no

    References listed on IDEAS

    as
    1. Michael Mussa, 1999. "Reforming the International Financial Architecture: Limiting Moral Hazard and Containing Real Hazard," RBA Annual Conference Volume,in: David Gruen & Luke Gower (ed.), Capital Flows and the International Financial System Reserve Bank of Australia.
    2. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
    3. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing: The Role of the IMF," International Finance, Wiley Blackwell, vol. 7(3), pages 421-450, December.
    4. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
    5. Giovanni Dell'Ariccia & Jeronimo Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending; A Test," IMF Working Papers 02/181, International Monetary Fund.
    6. 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.).
    7. Uma Ramakrishnan & Juan Zalduendo, 2006. "The Role of IMF Support in Crisis Prevention," IMF Working Papers 06/75, International Monetary Fund.
    8. Robert Flood & Nancy Marion, 2009. "Getting Shut Out of the International Capital Markets: It Doesn't Take Much ," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 879-889, November.
    9. Steven T Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
    10. Jun I Kim, 2006. "IMF-Supported Programs and Crisis Prevention; An Analytical Framework," IMF Working Papers 06/156, International Monetary Fund.
    11. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 20 Dec 2004.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:07/104. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.