The Mussa theorem (and other results on IMF-induced moral hazard)
By: Jeanne, Olivier.
Contributor(s): Zettelmeyer, Jeromin.
Material type:
ArticlePublisher: 2005Description: p.64-84.Subject(s): International Monetary Fund
In:
IMF Staff PapersSummary: Using a simple model of international lending, we show that as long as the IMF lends at a actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999 and 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem. - Reproduced.
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Articles
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Indian Institute of Public Administration | Volume no: 52, Issue no: Special issue | Available | AR69380 |
Using a simple model of international lending, we show that as long as the IMF lends at a actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999 and 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem. - Reproduced.
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