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A Theory of International Crisis Lending and IMF Conditionality

  • Jeromin Zettelmeyer
  • Jonathan David Ostry
  • Olivier Jeanne

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 International Monetary Fund in its series IMF Working Papers with number 08/236.

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Length: 33
Date of creation: 01 Oct 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/236
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  1. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International bailouts, moral hazard and conditionality," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 407-432, October.
  2. Andy Haldane, Bank of England & Mark Kruger, Bank of Canada, 2002. "The Resolution of International Financial Crises: Private Finance and Public Funds," Bank of Canada Review, Bank of Canada, vol. 2001(Winter), pages 3-13.
  3. Rochet, Jean-Charles & Vives, Xavier, 2004. "Coordination Failures and the Lender of Last Resort : Was Bagehot Right After All?," IDEI Working Papers 294, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Alex Mourmouras & Peter Rangazas, 2004. "Conditional Lending Under Altruism," IMF Working Papers 04/100, International Monetary Fund.
  5. Wolfgang Mayer & Alex Mourmouras, 2005. "On the Viability of Conditional Assistance Programs," IMF Working Papers 05/121, International Monetary Fund.
  6. Alex Mourmouras & Wolfgang Mayer, 2002. "Vested Interests in a Positive Theory of IFI Conditionality," IMF Working Papers 02/73, International Monetary Fund.
  7. Peter B. Kenen, 2001. "International Financial Architecture: What's New? What's Missing?, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 335.
  8. Chami, Ralph & Sharma, Sunil & Shim, Ilhyock, 2007. "A Model of the IMF as a Coinsurance Arrangement," Economics Discussion Papers 2007-26, Kiel Institute for the World Economy.
  9. Polak, J.J., 1991. "The Changing Nature of IMF Conditionality," Princeton Studies in International Economics 184, International Economics Section, Departement of Economics Princeton University,.
  10. 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.
  11. Jun Il Kim, 2006. "IMF-Supported Programs and Crisis Prevention: An Analytical Framework," IMF Working Papers 06/156, International Monetary Fund.
  12. Joseph P. Joyce, 2006. "Promises Made, Promises Broken: A Model Of Imf Program Implementation," Economics and Politics, Wiley Blackwell, vol. 18(3), pages 339-365, November.
  13. Carlos de Resende, 2007. "IMF-Supported Adjustment Programs: Welfare Implications and the Catalytic Effect," Working Papers 07-22, Bank of Canada.
  14. S. Nuri Erbas, 2003. "Imf Conditionality and Program Ownership: A Case for Streamlined Conditionality," IMF Working Papers 03/98, International Monetary Fund.
  15. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
  16. Jonathan David Ostry & Jeromin Zettelmeyer, 2005. "Strengthening IMF Crisis Prevention," IMF Working Papers 05/206, International Monetary Fund.
  17. Jacques J. Polak, 1991. "The Changing Nature of IMF Conditionality," OECD Development Centre Working Papers 41, OECD Publishing.
  18. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows: Do IMF-Supported Programs Work As Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund.
  19. Miller, Marcus & Zhang, Lei, 1998. "Sovereign Liquidity Crises: the Strategic Case for a Payments Standstill," CEPR Discussion Papers 1820, C.E.P.R. Discussion Papers.
  20. Gale, Douglas M & Vives, Xavier, 2001. "Dollarization, Bailouts and the Stability of the Banking System," CEPR Discussion Papers 2901, C.E.P.R. Discussion Papers.
  21. Olivier Jeanne, 2001. "The International Lender of Last Resort: How Large is Large Enought?," IMF Working Papers 01/76, International Monetary Fund.
  22. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  23. Peter B. Clark & Haizhou Huang, 2001. "International Financial Contagion and the IMF: A Theoretical Framework," IMF Working Papers 01/137, International Monetary Fund.
  24. 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.
  25. Walter B. Wriston, 1998. "Dumb Networks and Smart Capital," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), Winter.
  26. J. Zettelmeyer, 2000. "Can Official Crisis Lending be Counterproductive in the Short Run?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 29(1), pages 13-29, 02.
  27. Weithoner, Thomas, 2006. "How can IMF policy eliminate country moral hazard and account for externalities?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1257-1276, December.
  28. Charles W. Calomiris, 1998. "The IMF's Imprudent Role As Lender of Last Resort," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), pages 275-294, Winter.
  29. International Monetary Fund, 1998. "Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence," IMF Working Papers 98/169, International Monetary Fund.
  30. Wolfgang Mayer & Alex Mourmouras, 2004. "The Political Economy of Conditional and Unconditional Foreign Assistance: Grants vs. Loan Rollovers," IMF Working Papers 04/38, International Monetary Fund.
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