Liquidity protection versus moral hazard: the role of the IMF |
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Authors: | Andrew Powell Leandro Arozamena |
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Institution: | Business School, Universidad Torcuato Di Tella, Buenos Aires, Argentina |
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Abstract: | A game between the IMF, a country and atomistic private investors is motivated by recent crises including that in Argentina. The one stage game has no Nash equilibrium in pure strategies. Considering an equilibrium in mixed strategies, conditions are derived on whether the IMF should exist. A “cooperative first best” may be supported in a repeated game by a “minimum punishment strategy” but breaks down as the probability of insolvency rises. Countries are likely to deviate in bad times placing the IMF in an “impossible position”. The international financial architecture (IFA) remains incomplete. |
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Keywords: | International Monetary Fund International financial architecture Sovereign default |
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