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Do IMF and IBRD Cause Moral Hazard and Political Business Cycles? Evidence from Panel Data

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Axel Dreher ()
Roland Vaubel ()

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Abstract

Using panel data for 94 countries in 1975–97, we estimate OLS, 2SLS and GMM regressions to explain IMF and IBRD lending as well as monetary and fiscal policies in the recipient countries. With respect to moral hazard, we find that a country's government budget deficit and its rate of monetary expansion are higher the larger its borrowing potential in the Fund. New net lending of the Bank (relative to GDP) raises monetary expansion but lowers budget deficits of the recipient countries while new net credit from the Fund is associated with less expansionary policies. As for political business cycles, our evidence indicates that new net credits from the IMF are significantly larger prior to elections and that borrowing from the IBRD is significantly smaller after elections. Copyright Kluwer Academic Publishers 2004

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Publisher Info
Article provided by Springer in its journal Open Economies Review.

Volume (Year): 15 (2004)
Issue (Month): 1 (January)
Pages: 5-22
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Handle: RePEc:kap:openec:v:15:y:2004:i:1:p:5-22

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Related research
Keywords: IMF programs; IBRD programs; political business cycles; moral hazard;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Schuknecht, Ludger, 1996. "Political Business Cycles and Fiscal Policies in Developing Countries," Kyklos, Blackwell Publishing, vol. 49(2), pages 155-70.
  2. Timothy D. Lane & Steven Phillips, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
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  4. Jurg Niehans, 1985. "International debt with unenforceable claims," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 64-79. [Downloadable!]
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  6. Douglas W. Diamond & Raghuram G. Rajan, . "Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications."," CRSP working papers 518, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    Other versions:
  7. Putnam, Robert D, 1988. "Diplomacy and Domestic Politics: The Logic of Two-Level Games," International Organization, MIT Press, vol. 42(3), pages 427-60, Summer.
  8. Przeworski, Adam & Vreeland, James Raymond, 2000. "The effect of IMF programs on economic growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 385-421, August. [Downloadable!] (restricted)
  9. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March. [Downloadable!] (restricted)
  10. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460 National Bureau of Economic Research, Inc. [Downloadable!]
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  11. Dicks-Mireaux, Louis & Mecagni, Mauro & Schadler, Susan, 2000. "Evaluating the effect of IMF lending to low-income countries," Journal of Development Economics, Elsevier, vol. 61(2), pages 495-526, April. [Downloadable!] (restricted)
  12. Nash, John & DEC, 1993. "Implementation of trade reform in sub-Saharan Africa : how much heat and how much light?," Policy Research Working Paper Series 1218, The World Bank. [Downloadable!]
  13. Michael M. Hutchison, . "A Cure Worse Than The Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," EPRU Working Paper Series 01-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
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  14. Jan-Egbert Sturm & Helge Berger & Jakob de Haan, 2002. "IMF Credit: How Important Are Political Factors? A Robustness Analysis," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  15. Robert J. Barro & Jong-Wha Lee, 2002. "IMF Programs: Who is Chosen and What Are the Effects?," NBER Working Papers 8951, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Axel Dreher, 2003. "The influence of elections on IMF programme interruptions," The Journal of Development Studies, Taylor and Francis Journals, vol. 39(6), pages 101-120, January. [Downloadable!] (restricted)
  17. Knight, Malcolm & Santaella, Julio A., 1997. "Economic determinants of IMF financial arrangements," Journal of Development Economics, Elsevier, vol. 54(2), pages 405-436, December. [Downloadable!] (restricted)
  18. David O. Robinson & F. Rozwadowski & Susan Schadler & Siddharth Timari, 1993. "Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility," IMF Occasional Papers 106, International Monetary Fund.
  19. Graham Bird & Dane Rowlands, 1997. "The Catalytic Effect of Lending by the International Financial Institutions," The World Economy, Blackwell Publishing, vol. 20(7), pages 967-991, November. [Downloadable!] (restricted)
  20. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June. [Downloadable!]
  21. Conway, Patrick, 1994. "IMF lending programs: Participation and impact," Journal of Development Economics, Elsevier, vol. 45(2), pages 365-391, December. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Bjørnskov & Axel Dreher & Justina A. V. Fischer, 2005. "The bigger the better? Evidence of the effect of government size on life satisfaction around the world," Economics working paper series 05/44, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
    Other versions:
  2. Axel Dreher, 2004. "IMF and Economic Growth: The Effects of Programs, Loans, and Compliance with Conditionality," International Finance 0404004, EconWPA, revised 25 Apr 2004. [Downloadable!]
    Other versions:
  3. Axel Dreher, 2004. "Does the IMF cause moral hazard? A critical review of the evidence," International Finance 0402003, EconWPA, revised 29 Mar 2004. [Downloadable!]
  4. Vaubel, Roland, 2003. "Principal-Agent-Probleme in Internationalen Organisationen," Discussion Paper Series 26392, Hamburg Institute of International Economics. [Downloadable!]
  5. Axel Dreher & Nathan Jensen, 2003. "Independent Actor or Agent? An Empirical Analysis of the impact of US interests on IMF Conditions," International Finance 0310004, EconWPA, revised 08 Jan 2004. [Downloadable!]
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  6. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2006. "Does Membership on the UN Security Council Influence IMF Decisions? Evidence from Panel Data," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Axel Dreher, 2008. "IMF Conditionality: Theory and Evidence," KOF Working papers 08-188, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
    Other versions:
  8. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, EconWPA. [Downloadable!]
  9. Axel Dreher & Roland Vaubel, 2003. "The Causes and Consequences of IMF Conditionality," International Finance 0309004, EconWPA, revised 17 Oct 2003. [Downloadable!]
    Other versions:
  10. Axel Dreher & Bernhard Herz & Volker Karb, 2006. "Is there a causal link between currency and debt crises?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 305-325. [Downloadable!]
    Other versions:
  11. Axel Dreher, 2005. "Does the IMF Influence Fiscal and Monetary Policy?," Journal of Policy Reform, Taylor and Francis Journals, vol. 8(3), pages 225-238, September. [Downloadable!] (restricted)
  12. Axel Dreher & Stefanie Walter, 2008. "Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises," KOF Working papers 08-186, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  13. Juan Zalduendo & Manuela Goretti & Bikas Joshi & Atish R. Ghosh & Alun H. Thomas, 2007. "Modeling Aggregate Use of Fund Resources--Analytical Approaches and Medium-Term Projections," IMF Working Papers 07/70, International Monetary Fund. [Downloadable!]
  14. Axel Dreher & Roland Vaubel, 2005. "Foreign Exchange Intervention And The Political Business Cycle: A Panel Data Analysis," International Finance 0505009, EconWPA. [Downloadable!]
    Other versions:
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