International Financial Contagion and the IMF : A Theoretical Framework

Author/Editor:

Peter B. Clark ; Haizhou Huang

Publication Date:

September 1, 2001

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

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 provide a model of contagion where countries borrow or lend for consumption smoothing at the market interest rate or a lower IMF rate. Highly indebted countries hit by large negative shocks to output will default. The resulting reduction in loanable funds raises interest rates, increases the vulnerability of other indebted countries, and can generate further rounds of defaults. In this environment the IMF can limit default and internalize the externality generated by contagion through its lending with conditionality. We characterize the IMF's optimal lending decision in mitigating the loss in world consumption.

Series:

Working Paper No. 01/137

Subject:

English

Publication Date:

September 1, 2001

ISBN/ISSN:

9781451855913/1018-5941

Stock No:

WPIEA1372001

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

31

Please address any questions about this title to publications@imf.org