Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach

The IMF creates "moral hazard," when it provides bailouts to countries that face a BOP crisis. Two central questions are posed: is moral hazard observable in the data; and, if it is, what is its magnitude? We search for evidence that the unprecedented bailouts of the last decade have changed the investing environment in such a way that international investors started believing that their investments were insured. Our events-study is based on IMF-led events identified as both important and unexpected, such as the bailout loan for Mexico in 1995 and the absence of one for Russia in 1998. Our conclusion is negative: no such change in the moral hazard effect was observed. We demonstrate that events surrounding the out-of-sample Argentinean default (Dec. 2001) support our finding