Crash for cash: offshore financial destinations and IMF programs

Kern, A., Nosrati, E., Reinsberg, B. and Sevinc, D. (2023) Crash for cash: offshore financial destinations and IMF programs. European Journal of Political Economy, 78, 102359. (doi: 10.1016/j.ejpoleco.2023.102359)

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A growing body of literature scrutinizes the harmful consequences of capital flight to offshore financial destinations. While financial integration is a well-known facilitator of capital flight, we shed light on an under-appreciated determinant—the availability of an IMF bailout. Expanding on previous literature analyzing moral hazard in the context of IMF programs, we introduce a socially even more destructive mechanism that we label the ‘crash for cash’ effect. We argue that by drawing on the IMF, elites can benefit from accumulating excessive debt to extract rents and hide these safely in offshore financial destinations while steering their countries into financial disaster. To test this mechanism, we show that elite wealth in offshore bank accounts has a first-order impact on a captured government’s willingness to draw on a lender of last resort. From a policy perspective, our analysis underscores the importance of closing financial loopholes to mitigate the devastating socio-economic effects of sophisticated financial engineering in a financially integrated global economy.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Reinsberg, Dr Bernhard
Authors: Kern, A., Nosrati, E., Reinsberg, B., and Sevinc, D.
College/School:College of Social Sciences > School of Social and Political Sciences > Politics
Journal Name:European Journal of Political Economy
ISSN (Online):1873-5703
Published Online:02 February 2023
Copyright Holders:Copyright © 2023 The Authors
First Published:First published in European Journal of Political Economy 78:102359
Publisher Policy:Reproduced under a Creative Commons licence

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