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The effect of IMF lending on the probability of sovereign debt crises

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  • Jorra, Markus

Abstract

This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We find that IMF programs significantly increase the probability of subsequent sovereign defaults by approximately 1.5–2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by specifications that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to fiscal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the effects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 4 ()
Pages: 709-725

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:709-725

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: IMF programs; Sovereign defaults; Bivariate probit; International financial architecture;

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Cited by:
  1. Luca Papi & Andrea Filippo Presbitero & Alberto Zazzaro, 2013. "IMF Lending and Banking Crises," Mo.Fi.R. Working Papers 80, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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