The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)

Author/Editor:

Olivier D Jeanne ; Jeronimo Zettelmeyer

Publication Date:

October 1, 2004

Electronic Access:

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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:

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, 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.

Series:

Working Paper No. 04/192

Subject:

English

Publication Date:

October 1, 2004

ISBN/ISSN:

9781451859799/1018-5941

Stock No:

WPIEA1922004

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

25

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