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Can the Moral Hazard Caused by IMF Bailouts be Reduced?

Geneva Reports on the World Economy Special Report 1

By Barry Eichengreen

The need to limit IMF financial rescues is a theme of the literature on how to make the world a safer financial place. Those who propose to simply prohibit IMF rescues assume that it is politically feasible for the Fund to stand aside when a crisis erupts. The reality is that the costs of inaction (a severe economic contraction, an extended interruption to capital-market access, and a lengthy and difficult restructuring) are too painful for the official community to bear. In this first ‘Special Report’ in the ICMB/CEPR series of Geneva Reports on the World Economy, Professor Eichengreen argues that institutional reforms that address these dilemmas are needed if the international policy community is to succeed in containing moral hazard. Barry Eichengreen, University of California Berkeley and CEPR.

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