A Theory of International Crisis Lending and IMF Conditionality

Jeromin Zettelmeyer, Jonathan Ostry and Olivier Jeanne

No 2008/236, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; IMF lending; IMF crisis lending; substitution effect (search for similar items in EconPapers)
Pages: 33
Date: 2008-10-01
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Citations: View citations in EconPapers (25)

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