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How can the IMF catalyse private capital flows? A model

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  • Adrian Penalver
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    Abstract

    This paper presents a model to explain how IMF programmes can catalyse private capital flows following a financial crisis, a concept that was at the heart of the IMF's strategy for dealing with capital account crises in the late 1990s. In the model, the IMF lends funds below the prevailing market interest rate and it is this subsidy that induces the borrowing country to exert adjustment effort to avoid default. By preventing default, future marginal rates of return on investment are kept high, thereby encouraging private capital flows. The IMF may also have a signalling role if it has superior information about debtor type and can affect the interest rate charged in the immediate aftermath of a crisis. In practice, however, IMF programmes based on the catalytic approach have been disappointing and actual private capital flows have been considerably below those projected. Therefore, the paper also considers how capital flows derived from the model are sensitive to the assumptions made. The paper concludes by discussing the policy implications of the analysis for IMF programme design.

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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 215.

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    Date of creation: Apr 2004
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    Handle: RePEc:boe:boeewp:215

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    1. Stephen Morris & Hyun Song Shin, 2003. "Catalytic Finance: When Does It Work?," Cowles Foundation Discussion Papers 1400, Cowles Foundation for Research in Economics, Yale University.
    2. Graham Bird & Dane Rowlands, 2002. "Do IMF Programmes Have a Catalytic Effect on Other International Capital Flows?," Oxford Development Studies, Taylor & Francis Journals, vol. 30(3), pages 229-249.
    3. Prasanna Gai & Simon Hayes & Hyun Song Shin, 2001. "Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises," LSE Research Online Documents on Economics 25066, London School of Economics and Political Science, LSE Library.
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    6. Jeffrey D. Sachs, 1989. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 255-296 National Bureau of Economic Research, Inc.
    7. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages C111-25, March.
    8. Andrew G Haldane & Gregor Irwin & Victoria Saporta, 2004. "Bail out or work out? Theoretical considerations," Bank of England working papers 219, Bank of England.
    9. Miller, Marcus & Zhang, Lei, 2000. "Sovereign Liquidity Crises: The Strategic Case for a Payments Standstill," Economic Journal, Royal Economic Society, vol. 110(460), pages 335-62, January.
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    13. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
    14. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report 209, Federal Reserve Bank of Minneapolis.
    15. Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
    16. Ales Bulir & Marianne Schulze-Gattas & Atish R. Ghosh & Alex Mourmouras & A. Javier Hamann & Timothy D. Lane, 2002. "IMF-Supported Programs in Capital Account Crises," IMF Occasional Papers 210, International Monetary Fund.
    17. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
    18. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
    19. Curzio Giannini & Carlo Cottarelli, 2002. "Bedfellows, Hostages, or Perfect Strangers? Global Capital Markets and the Catalytic Effect of IMF Crisis Lending," IMF Working Papers 02/193, International Monetary Fund.
    20. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2005. "The IMF in a world of private capital markets," Working Paper Series 2005-12, Federal Reserve Bank of San Francisco.
    2. Diego Saravia, 2004. "On the Role and E ects of IMF Seniority," Econometric Society 2004 Latin American Meetings 131, Econometric Society.
    3. J. Brandes & Tobias Schüle, 2008. "IMF’s assistance: Devil’s kiss or guardian angel?," Journal of Economics, Springer, vol. 94(1), pages 63-86, 06.

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