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

By Olivier D Jeanne, Jeromin Zettelmeyer

October 1, 2004

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Olivier D Jeanne, and Jeromin Zettelmeyer. The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard), (USA: International Monetary Fund, 2004) accessed December 22, 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

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.

Subject: Capital flows, Emerging and frontier financial markets, Insurance, Loans, Moral hazard

Keywords: Debtor country, Emerging market, IMF lending, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/192
Stock No:

WPIEA1922004
ISBN:

9781451859799
ISSN:

1018-5941

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