| Last updated: September 2005
Volume 52, Special Issue
The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)Olivier Jeanne and Jeromin Zettelmeyer
Full Text of this Article (PDF 164K)
Abstract: Using a simple model of international lending, we show
that as long as the IMF lends at an actuarially fair interest rate and
debtor governments maximize the welfare of their taxpayers, any changes
in policy effort, capital flows, or borrowing costs in response to IMF
crisis lending are efficient. Thus, under these assumptions, the IMF
cannot cause moral hazard, as argued by Michael Mussa (1999 and 2004).
It follows that examining the effects of IMF lending on capital flows
or borrowing costs is not a useful strategy to test for IMF-induced
moral hazard. Instead, empirical research on moral hazard should focus
on the assumptions of the Mussa theorem.
[JEL F32, F33]