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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. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers 3233, C.E.P.R. Discussion Papers.
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  5. Marcus Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for a Payments Standstill," CSGR Working papers series 35/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
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  8. Diego Saravia & Ashoka Mody, 2003. "Catalyzing Capital Flows: Do IMF-Supported Programs Work As Commitment Devices?," IMF Working Papers 03/100, International Monetary Fund.
  9. Olivier Jeanne & Charles Wyplosz, 2001. "The International Lender of Last Resort: How Large is Large Enough?," NBER Working Papers 8381, National Bureau of Economic Research, Inc.
  10. 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.
  11. Olivier Jeanne & Jeromin Zettelmeyer, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series 563, CESifo Group Munich.
  12. Douglas Gale & Xavier Vives, 2001. "Dollarization, bailouts, and the stability of the banking system," Proceedings 729, Federal Reserve Bank of Chicago.
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  14. Carlos de Resende, 2007. "IMF-Supported Adjustment Programs: Welfare Implications and the Catalytic Effect," Working Papers 07-22, Bank of Canada.
  15. 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.
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  19. Ralph Chami & Ilhyock Shim & Sunil Sharma, 2004. "A Model of the Imf As a Coinsurance Arrangement," IMF Working Papers 04/219, International Monetary Fund.
  20. repec:imf:imfwpa:04/100 is not listed on IDEAS
  21. Andy Haldane & Mark Kruger, 2001. "The Resolution of International Financial Crises: Private Finance and Public Funds," Working Papers 01-20, Bank of Canada.
  22. repec:imf:imfwpa:05/121 is not listed on IDEAS
  23. S. Nuri Erbas, 2003. "Imf Conditionality and Program Ownership: A Case for Streamlined Conditionality," IMF Working Papers 03/98, International Monetary Fund.
  24. Peter B. Clark & Haizhou Huang, 2001. "International Financial Contagion and the Fund: A Theoretical Framework," IMF Working Papers 01/137, International Monetary Fund.
  25. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
  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. repec:imf:imfwpa:98/169 is not listed on IDEAS
  28. repec:imf:imfwpa:05/206 is not listed on IDEAS
  29. 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.
  30. 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.
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