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Liquidity Protection versus Moral Hazard: The Role of the IMF

Andrew Powell y Leandro Arozamena
Authors registered in the RePEc Author Service: Leandro Arozamena () and Andrew Powell

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: This paper develops a simple game between the IMF a county and a set of atomistic private investors. The model is motivated by the case of Argentina. Under reasonable assumptions, the one shot game has no Nash equilibrium in pure strategies. Considering an equilibrium in mixed strategies, conditions are derived on whether the IMF should exist. A “cooperative first best” may be supported in a repeated game by a “minimum punishment strategy” that may be optimal but may break down if the probability of insolvency rises. This implies that countries are likely to deviate in bad times placing the IMF in an “impossible position”. It is suggested that the international financial architecture (IFA) remains incomplete.

Pages: 34 pages
Date: 2003
New Economics Papers: this item is included in nep-fin and nep-mac
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