Working Paper: CEPR ID: DP7022
Authors: Olivier Jeanne; Jonathan D. Ostry; Jeronim Zettelmeyer
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: No keywords provided
JEL Codes: F02; F32; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IMF lending (F34) | crisis prevention efforts (H12) |
| effective IMF conditionality (F33) | optimal level of crisis prevention efforts (H12) |
| domestic policymakers' objectives diverging from global welfare maximization (F68) | suboptimal crisis prevention efforts (H12) |
| IMF's role as a delegated monitor (F33) | necessary policy adjustments (E61) |
| IMF lending (F34) | reduction in crisis prevention efforts (H12) |
| ex ante conditionality (F35) | adequate crisis prevention efforts (H12) |