Unconditional IMF Financial Support and Investor Moral Hazard
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.
|Date of creation:||01 May 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004.
"Keeping Capital Flowing: The Role of the IMF,"
IMF Working Papers
04/197, International Monetary Fund.
- Jun Il Kim, 2006. "IMF-Supported Programs and Crisis Prevention: An Analytical Framework," IMF Working Papers 06/156, International Monetary Fund.
- Nancy P. Marion & Robert P. Flood, 2006. "Getting Shut Out of the International Capital Markets - It Doesnâ€™t Take Much," IMF Working Papers 06/144, International Monetary Fund.
- 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.).
- Olivier Jeanne & Jeromin Zettelmeyer, 2001.
"International bailouts, moral hazard and conditionality,"
CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
- Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series 563, CESifo Group Munich.
- Stephen Morris & Hyun Song Shin, 1999.
"Coordination Risk and the Price of Debt,"
Cowles Foundation Discussion Papers
1241, Cowles Foundation for Research in Economics, Yale University.
- Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
- Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
- Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers dp373, Financial Markets Group.
- Hyun Shin, 2001. "Coordination Risk and the Price of Debt," Economics Series Working Papers 1999-W25, University of Oxford, Department of Economics.
- Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
- Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004.
- 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.
- Uma Ramakrishnan & Juan Zalduendo, 2006. "The Role of IMF Support in Crisis Prevention," IMF Working Papers 06/75, International Monetary Fund.
- Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
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)
If references are entirely missing, you can add them using this form.