International financial rescues and debtor-country moral hazard

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 14 May 2004

Working Paper No. 217
By Prasanna Gai and Ashley Taylor

This paper examines whether recent international policy initiatives to facilitate financial rescues in emerging market countries have influenced debtors’ incentives to access official sector resources. The paper highlights a country’s systemic importance as a key characteristic that drives access to official sector finance. It estimates the effect of these policy initiatives on IMF programme participation using a pooled probit model. The safety net implied by policy changes to permit exceptional access is shown to have a greater marginal impact on the use of official sector resources, the more systemically important the debtor country is. The paper’s results can be interpreted as offering some support for the presence of debtor-country moral hazard.

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