Does IMF Financing Produce Moral Hazard?

Moral hazard is a term often used when analyzing the effects of insurance. It refers to the idea that the very provision of insurance raises the likelihood of the event being insured against taking place. This is because insurance reduces the incentives for the insured party to take preventive actions. Some simple examples would be: • A homeowner taking less care in locking up his home once it is insured; • A motor vehicle owner driving more recklessly because his vehicle is insured; • A person taking less care of his health once he has health insurance. In the financial context, economists and policy makers debate whether the availability of financial support from institutions like the International Monetary Fund (IMF) leads to moral hazard. That is, does the IMF's role as a lender to countries in financial crisis actually encourage borrowers and lenders to behave in ways that makes a crisis more likely? Following the series of financial market crises that beset emerging markets in ...  more