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A Theory of International Crisis Lending and IMF Conditionality

Author/Editor: Jeanne, Olivier | Zettelmeyer, Jeromin | Ostry, Jonathan David
Authorized for Distribution: October 1, 2008
Electronic Access: Free Full Text (PDF file size is 606KB)
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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 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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Series: Working Paper No. 08/236
Subject(s): Financial crisis | Crisis prevention | Fund role | Conditionality | Moral hazard | Spillovers
Author's keyword(s): International Monetary Fund; crisis prevention; ex ante conditionality
 
English  
    Published:   October 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008236   Pages:   33
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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