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The Causes and Consequences of IMF Conditionality

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Author Info
AXEL DREHER
ROLAND VAUBEL

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Abstract

We develop a public choice model of the International Monetary Fund (IMF) in which credit and conditionality are simultaneously determined by the demand for, and supply of, IMF credit. A graphical analysis illustrates the comparative statics in response to various shocks. We apply the model to explain the main changes in the rules governing conditionality and in the number of conditions per program. We observe a highly significant positive correlation between the number of conditions per program and the prior use of Fund credit relative to quota in 1959-99. A panel data analysis of 206 letters of intent from April 1997 through February 2003 reveals that the number of conditions depends negatively on international reserves and positively on interest rates in the world capital market, monetary expansion in the borrowing country, and the number of World Bank adjustment loans. Finally, the effects of conditionality are analyzed for the first time. Our instrumental variables estimate shows that the number of conditions do not have a significant effect on any of the five typical instrument and target variables considered. The final section links the analysis of IMF conditionality with the literature on tied transfers in public economics and develops some novel proposals for the reform of IMF conditionality.

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Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

Volume (Year): 40 (2001)
Issue (Month): 3 (May)
Pages: 26-54
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Handle: RePEc:mes:emfitr:v:40:y:2001:i:3:p:26-54

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

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Related research
Keywords: conditionality; International Monetary Fund; public choice;

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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. Bruce, Neil & Waldman, Michael, 1991. "Transfers in Kind: Why They Can Be Efficient and Nonpaternalistic," American Economic Review, American Economic Association, vol. 81(5), pages 1345-51, December. [Downloadable!] (restricted)
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  2. 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)
  3. Axel Dreher & Roland Vaubel, 2004. "Do IMF and IBRD Cause Moral Hazard and Political Business Cycles? Evidence from Panel Data," Open Economies Review, Springer, vol. 15(1), pages 5-22, January. [Downloadable!] (restricted)
  4. 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)
  5. Roland Vaubel & Axel Dreher & Ugurlu Soylu, 2003. "Staff Growth in International Organizations: A Principal-Agent Problem? An Empirical Analysis," Public Economics 0306006, EconWPA, revised 08 Jul 2003. [Downloadable!]
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  6. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May. [Downloadable!] (restricted)
  7. Garfinkel, Irwin, 1973. "Is In-Kind Redistribution Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 87(2), pages 320-30, May. [Downloadable!] (restricted)
  8. Graham Bird & Dane Rowlands, 2003. "Political Economy Influences Within the Life-Cycle of IMF Programmes," The World Economy, Blackwell Publishing, vol. 26(9), pages 1255-1278, 09. [Downloadable!] (restricted)
  9. Evrensel, Ayse Y., 2002. "Effectiveness of IMF-supported stabilization programs in developing countries," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 565-587, October. [Downloadable!] (restricted)
  10. Axel Dreher, 2004. "The Influence of IMF Programs on the Re-election of Debtor Governments," Economics and Politics, Blackwell Publishing, vol. 16(1), pages 53-76, 03. [Downloadable!] (restricted)
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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. 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:
  2. 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!]
    Other versions:
  3. Axel Dreher, 2008. "IMF Conditionality: Theory and Evidence," KOF Working papers 08-188, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
    Other versions:
  4. 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)
  5. 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!]
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