Does the “News” Reveal Moral Hazard?
A “news-based” or “event study” approach can also be used to explore the moral hazard question. In this approach, one would first identify specific events that might have relayed new information to markets that would influence their outlook for the future availability of IMF financial support. By using daily data and looking at the behavior of spreads over very short periods, this approach seeks to isolate the influence of the IMF-related news from other factors. If investors do believe that the availability of IMF financing significantly influences the riskiness of their investments, secondary market bond prices can be expected to react immediately to such news. Of course, this type of approach has its limitations—particularly that it cannot distinguish moral hazard (undesirable effects on economic behavior) from the desirable effects of the IMF in reducing the real economic damage of a crisis. This stacks the cards in favor of finding evidence consistent with moral hazard. On the oth
