A Theory of International Crisis Lending and IMF Conditionality

Jonathan Ostry, Olivier Jeanne and Jeromin Zettelmeyer ()

No 7022, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

JEL-codes: F02 F32 F33 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cba and nep-cta
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Citations: View citations in EconPapers (22)

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Working Paper: A Theory of International Crisis Lending and IMF Conditionality (2008)
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