Moral Hazard and International Crisis Lending: A Test

Author/Editor: Dell'Ariccia, Giovanni ; Schnabel, Isabel ; Zettelmeyer, Jeromin
Publication Date: October 01, 2002
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.
Series: Working Paper No. 02/181
Subject(s): Bonds | Russian Federation | Financial crisis | Moral hazard | Debt | Economic models | Moral hazard

Author's Keyword(s): Moral hazard | international lending | financial crises | sovereign debt
Publication Date: October 01, 2002
ISBN/ISSN: 1934-7073 Format: Paper
Stock No: WPIEA1812002 Pages: 55
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