Central bank or International Monetary Fund lending should be regarded as a line of credit, analogous to private line-of-credit products. Contractual provisions in private line-of-credit arrangements are designed to control managerial moral hazard and provide a means for profit-maximizing...

This consideration of central bank lending as a publicly provided line of credit begins by describing how private line-of-credit contracts control moral hazard and limit lending to insolvent borrowers. The fundamental problem for a central bank is to credibly commit to limit its lending. Failure...