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IMF Conditionality




This paper presents a principal-agent model of IMF conditional lending, in the aftermath of a "capital-account" liquidity crisis. We show that traditional ex-post conditonality can be effective in safeguarding the Fund's resources, allowing for the provision of efficient emergency lending and reducing inefficient ex-ante credit rationing if the capital outflow which triggers the crisis is not excessive. We apply the baseline model to analyse the issues of debtor moral hazard and private sector involement (PSI), which have characterised the recent debate on reforming the International Financial Architecture. We show that debtor moral hazard is only a concern if the IMF cannot commit to make the post-crisis participation constraint of the debtor country binding, and that it can only be resolved via ex-ante conditionality (or pre-qualification). Attempts to reduce debtor moral hazard may however compromise the Fund's ability to safeguard its resources ex-post. We also show that PSI in the solution of balance of payments crisis is a central determinant of the effectiveness of both crisis prevention and resolution efforts on the part of the IMF. PSI may be an enabling condition for efficient crisis resolution, and may therefore be imposed even by a "PSI-averse" IMF. Moreover, there are conditions under which it is optimal for the IMF to ex-ante precommit to a tough, and ex-post sup-optimal, PSI policy,in order to mitigate investor moral hazard.

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  • Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
  • Handle: RePEc:nuf:econwp:0119

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    References listed on IDEAS

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    Cited by:

    1. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
    2. Drazen, Allan, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," CEPR Discussion Papers 3562, C.E.P.R. Discussion Papers.
    3. 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.
    4. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
    5. Prasanna Gai & Nicholas Vause, 2003. "Sovereign debt workouts with the IMF as delegated monitor - a common agency approach," Bank of England working papers 187, Bank of England.

    More about this item


    IMF; conditionality; balance of payments crisis.;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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