{
  "title": "Unconditional IMF Financial Support and Investor Moral Hazard",
  "publication": "IMF Working Papers, May 1, 2007",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/unconditional-imf-financial-support-and-investor-moral-hazard-20667",
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  "summary": "This paper develops a simple model of international lending, and calibrates it to assess quantitatively the effects of contingent IMF financial support on the risk premiums and the crisis probability.",
  "sections": [
    {
      "heading": "Model and Calibration",
      "content": "- Develops a simple model of international lending in which:\n  - the country borrows in both short and long term;\n  - market (coordination) failure triggers a liquidity run and inefficient default;\n  - the IMF lends unconditionally under a preferred creditor status.\n- Calibrates the model to assess quantitatively the effects of contingent IMF financial support on risk premiums and the crisis probability."
    },
    {
      "heading": "Main Findings",
      "content": "- IMF financial support can help prevent a liquidity crisis without causing investor moral hazard by removing a distortion that effectively subsidizes ex post short-term investors (who run for the exit) at the expense of long-term investors (who are locked in).\n- The resulting equilibrium is welfare enhancing:\n  - the country's borrowing costs are lower;\n  - the likelihood of a crisis is lower.\n- IMF-induced investor moral hazard—which occurs if the IMF lends at a subsidized rate—is unlikely to be a concern in practice, particularly if:\n  - the country's economic fundamentals are strong;\n  - short-term debt is small."
    },
    {
      "heading": "Policy Implications and Interpretation",
      "content": "- Unconditional IMF lending under preferred creditor status can play a crisis-prevention role by addressing coordination failures and liquidity runs.\n- Concerns about investor moral hazard from IMF lending are mitigated when IMF support does not operate as a subsidy to investors or when country fundamentals and debt structure reduce vulnerability.\n\n---\n\n Content in this bundle\n\n- wp07104\n  - wp07104 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp07104 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/unconditional-imf-financial-support-and-investor-moral-hazard-20667"
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    "Authors: Jun I Kim",
    "Published: May 1, 2007",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451866681.001",
    "Develops a simple model of international lending in which:",
    "Calibrates the model to assess quantitatively the effects of contingent IMF financial support on risk premiums and the crisis probability.",
    "IMF financial support can help prevent a liquidity crisis without causing investor moral hazard by removing a distortion that effectively subsidizes ex post short-term investors (who run for the exit) at the expense of long-term investors (who are locked in).",
    "The resulting equilibrium is welfare enhancing:",
    "IMF-induced investor moral hazard—which occurs if the IMF lends at a subsidized rate—is unlikely to be a concern in practice, particularly if:",
    "Unconditional IMF lending under preferred creditor status can play a crisis-prevention role by addressing coordination failures and liquidity runs.",
    "Concerns about investor moral hazard from IMF lending are mitigated when IMF support does not operate as a subsidy to investors or when country fundamentals and debt structure reduce vulnerability.",
    "**_wp07104**"
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