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Does IDA Engage in Defensive Lending?

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  • Carolin Geginat
  • Aart Kraay

Abstract

Multilateral development banks are sometimes thought to engage in "defensive lending" -- the practice of extending new loans purely in order to ensure that existing loans are repaid. We empirically examine this hypothesis using data on lending extended by and repayments to the International Development Association (IDA), which is the largest multilateral provider of concessional development loans to low-income countries. We argue that key institutional features of IDA both (i) potentially create incentives for defensive lending and also (ii) enable particularly sharp tests of the defensive lending hypothesis. We find that there is a surprisingly robust partial correlation between disbursements on new IDA loans and repayments on existing loans. However, a closer look at the evidence suggests that defensive lending is unlikely to be a major explanation for this relationship.

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Bibliographic Info

Article provided by Università di Perugia in its journal Review of Economics and Institutions.

Volume (Year): 3 (2012)
Issue (Month): 2 ()
Pages:

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Handle: RePEc:pia:review:v:3:y:2012:i:2:n:3

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Keywords: defensive lending; international development association;

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Cited by:
  1. Marchesi, Silvia & Missale, Alessandro, 2013. "Did High Debts Distort Loan and Grant Allocation to IDA Countries?," World Development, Elsevier, vol. 44(C), pages 44-62.
  2. Claudio Raddatz, 2011. "Multilateral Debt Relief through the Eyes of Financial Markets," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1262-1288, November.
  3. Bjørnskov, Christian & Schröder, Philipp J.H., 2013. "Are debt repayment incentives undermined by foreign aid?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1073-1091.
  4. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.

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