Global Financial Crises and Monetary System
The Asian currency crisis and the financial crisis in the Eurozone causes repeated economic turmoil at the national level. This paper examines the systems that cause such conditions from the perspective that the essential cause of financial crises is an inefficient investment by debtor countries. For analysis, we consider a tripartite model consisting of the debtor country, investors and related countries, and international organizations such as the IMF, EU, and ECB as agents of the investors. In the event of a crisis where a debtor country defaults on its debt, the agent may provide financial support to the debtor country, considering the interests of investors and relevant countries. The agent may also bear the cost and control the fiscal tightening policy of the debtor country that received the support. In this paper, we identify the incentives of debtor countries to invest and the incentives of their agents and consider under what conditions debtor countries can raise funds and make risky or inefficient investments. One of the conclusions is that if the agent’s cost of controlling the debtor country is sufficiently small, the debtor country can raise the funds to finance and implement risky investments and when international organizations such as the IMF increase their funds in preparation for financial crises and clearly state that they will tighten their policies when they provide support, they may not be able to prevent risky investments from being made, making it impossible to avoid the occurrence of financial crises.
Keywords: euro economic crisis, IMF, incomplete contracts, moral hazard, soft budgeting
JEL Classification Code: E44, F31, F33, F34
