A Theory of International Crisis Lending and IMF Conditionality

By Jeromin Zettelmeyer, Jonathan David Ostry, Olivier D Jeanne

October 1, 2008

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Jeromin Zettelmeyer, Jonathan David Ostry, and Olivier D Jeanne. A Theory of International Crisis Lending and IMF Conditionality, (USA: International Monetary Fund, 2008) accessed November 9, 2024

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.

Subject: Crisis prevention, Crisis resolution, Financial crises, Moral hazard, Political economy

Keywords: IMF crisis lending, IMF lending, Substitution effect, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/236
Stock No:

WPIEA2008236
ISBN:

9781451870947
ISSN:

1018-5941

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