Social and Behavioral Sciences Commons^™

Catalytic Finance: When Does It Work?, Stephen Morris, Hyun Song Shin

Cowles Foundation Discussion Papers

In a simple model of currency crises caused by creditor coordination failure, we show that bailouts that reduce ex post inefficiency will sometimes create ex ante moral hazard but will sometimes enhance the incentives for governments to take preventative actions. This model helps us understand a debate about the role of the IMF in catalyzing lending to developing countries.