IMF Conditionality

Giulio Federico ()
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Giulio Federico: Nuffield College, Oxford, http://www.nuff.ox.ac.uk/

No 2001-W19, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: This paper presents a principal-agent model of IMF conditional lending, in the aftermath of a "capital-account" liquidity crisis. We show that traditional ex-post conditonality can be effective in safeguarding the Fund's resources, allowing for the provision of efficient emergency lending and reducing inefficient ex-ante credit rationing if the capital outflow which triggers the crisis is not excessive. We apply the baseline model to analyse the issues of debtor moral hazard and private sector involement (PSI), which have characterised the recent debate on reforming the International Financial Architecture. We show that debtor moral hazard is only a concern if the IMF cannot commit to make the post-crisis participation constraint of the debtor country binding, and that it can only be resolved via ex-ante conditionality (or pre-qualification). Attempts to reduce debtor moral hazard may however compromise the Fund's ability to safeguard its resources ex-post. We also show that PSI in the solution of balance of payments crisis is a central determinant of the effectiveness of both crisis prevention and resolution efforts on the part of the IMF. PSI may be an enabling condition for efficient crisis resolution, and may therefore be imposed even by a "PSI-averse" IMF. Moreover, there are conditions under which it is optimal for the IMF to ex-ante precommit to a tough, and ex-post sup-optimal, PSI policy,in order to mitigate investor moral hazard.

Keywords: IMF; conditionality; balance of payments crisis. (search for similar items in EconPapers)
JEL-codes: F33 F34 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2001-02-01, Revised 2001-09-01
New Economics Papers: this item is included in nep-cba and nep-lam
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:0119

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