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The Causes and Consequences of IMF Conditionality

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  • AXEL DREHER
  • ROLAND VAUBEL

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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Bibliographic Info

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

Volume (Year): 40 (2004)
Issue (Month): 3 (May)
Pages: 26-54

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Handle: RePEc:mes:emfitr:v:40:y:2004:i:3:p:26-54

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

Related research

Keywords: conditionality; International Monetary Fund; public choice;

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References

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  1. Graham Bird & Dane Rowlands, 2003. "Political Economy Influences Within the Life-Cycle of IMF Programmes," The World Economy, Wiley Blackwell, vol. 26(9), pages 1255-1278, 09.
  2. Roland Vaubel & Axel Dreher & Uğurlu Soylu, 2007. "Staff growth in international organizations: A principal-agent problem? An empirical analysis," Public Choice, Springer, vol. 133(3), pages 275-295, December.
  3. Axel Dreher, 2003. "The influence of elections on IMF programme interruptions," Journal of Development Studies, Taylor & Francis Journals, vol. 39(6), pages 101-120.
  4. 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.
  5. Garfinkel, Irwin, 1973. "Is In-Kind Redistribution Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 87(2), pages 320-30, May.
  6. Neil Bruce & Michael Waldman, 1988. "Transfers in Kind: Why They Can Be Efficient and Non-Paternalistic," UCLA Economics Working Papers 532, UCLA Department of Economics.
  7. Roland VAUBEL, 1985. "International Collusion or Competition for Macroeconomic Policy Coordination? A Restatement," Discussion Papers (REL - Recherches Economiques de Louvain) 1985031, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  8. 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.
  9. 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.
  10. 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.
  11. Axel Dreher, 2004. "The Influence of IMF Programs on the Re-election of Debtor Governments," Economics and Politics, Wiley Blackwell, vol. 16(1), pages 53-76, 03.
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Citations

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Cited by:
  1. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
  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.
  3. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2010. "Does membership on the UN Security Council influence IMF conditionality?," KOF Working papers 10-262, KOF Swiss Economic Institute, ETH Zurich.
  4. 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.
  5. Jean-Pierre Allegret & Philippe Dulbecco, 2007. "The institutional failures of International Monetary Fund conditionality," The Review of International Organizations, Springer, vol. 2(4), pages 309-327, December.
  6. Axel Dreher, 2004. "IMF and Economic Growth: The Effects of Programs, Loans, and Compliance with Conditionality," International Finance 0404004, EconWPA, revised 25 Apr 2004.
  7. Axel Dreher & Jan-Egbert Sturm & James Raymond Vreeland, 2006. "Does membership on the UN Security Council influence IMF decisions? Evidence from panel data," KOF Working papers 06-151, KOF Swiss Economic Institute, ETH Zurich.
  8. Jeffrey M. Chwieroth, 2012. ""The silent revolution": how the staff exercise informal governance over IMF lending," LSE Research Online Documents on Economics 46623, London School of Economics and Political Science, LSE Library.
  9. Timothy McKeown, 2009. "How U.S. decision-makers assessed their control of multilateral organizations, 1957–1982," The Review of International Organizations, Springer, vol. 4(3), pages 269-291, September.
  10. Martin Steinwand & Randall Stone, 2008. "The International Monetary Fund: A review of the recent evidence," The Review of International Organizations, Springer, vol. 3(2), pages 123-149, June.
  11. Glen Biglaiser & Karl DeRouen, 2011. "How soon is now? The effects of the IMF on economic reforms in Latin America," The Review of International Organizations, Springer, vol. 6(2), pages 189-213, July.
  12. Axel Dreher, 2005. "Does the IMF Influence Fiscal and Monetary Policy?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(3), pages 225-238.
  13. James Vreeland, 2006. "IMF program compliance: Aggregate index versus policy specific research strategies," The Review of International Organizations, Springer, vol. 1(4), pages 359-378, December.

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