Moral Hazard and International Crisis Lending: A Test
IMF Working Papers, October 1, 2002
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Bibliographic details
- Authors: Giovanni Dell'Ariccia, Jeromin Zettelmeyer, Isabel Schnabel
- Published: October 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859201.001
Research question and context
- 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.
- Hypothesized implications in the presence of moral hazard:
- A rise in the level of sovereign bond spreads.
- An increase in the sensitivity with which spreads reflect fundamentals.
- An increase in cross-country dispersion of spreads.
Data and empirical approach
- Analysis focuses on sovereign bond spreads in emerging markets, comparing behavior before and after the Russian crisis (nonbailout in August 1998).
- The study examines three distinct measurable effects tied to moral hazard (level, sensitivity to fundamentals, cross-country dispersion).
Key findings
- The authors report strong evidence for all three predicted effects:
- Higher levels of sovereign bond spreads after the perceived decrease in crisis lending probability.
- Greater sensitivity of spreads to fundamentals following the event.
- Increased cross-country dispersion of spreads after the event.