This paper contributes to the debate on the efficacy of IMF’s catalytic finance in preventing financial crises. Extending Morris and Shin (J Int Econ 70: 161–177, 2006), we consider that the IMF’s intervention policy usually exerts a signaling effect on private creditors and that several interventions in sequence may be necessary to avert an impending crisis. Without the IMF’s signaling ability, our results state that repeated intervention is required to bail out a country, whereby additional assistance may induce moral hazard on the debtor side. Contrarily, if the IMF exerts a strong signaling effect, one single intervention suffices to avoid liquidity crises.
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Brandes, J., Schüle, T. IMF’s assistance: Devil’s kiss or guardian angel?. J Econ 94, 63–86 (2008). https://doi.org/10.1007/s00712-007-0309-8
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DOI: https://doi.org/10.1007/s00712-007-0309-8