Moral Hazard and International Crisis Lending: A Test

Author/Editor:

Giovanni Dell'Ariccia ; Jeromin Zettelmeyer ; Isabel Schnabel

Publication Date:

October 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We test for the existence of a moral hazard effect attributable to official crisis lending by analyzing the evolution of sovereign bond spreads in emerging markets before and after the Russian crisis. The nonbailout of Russia in August 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets. In the presence of moral hazard, such an event should raise not only the level of spreads, but also the sensitivity with which spreads reflect fundamentals as well as their cross-country dispersion. We find strong evidence for all three effects.

Series:

Working Paper No. 2002/181

Subject:

Emerging and frontier financial markets Financial crises Financial markets Financial sector policy and analysis Financial services Moral hazard Securities markets Yield curve

English

Publication Date:

October 1, 2002

ISBN/ISSN:

9781451859201/1018-5941

Stock No:

WPIEA1812002

Pages:

55

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