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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. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
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    4. 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.
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    7. Jeffrey D. Sachs, 1989. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Chapters, in: Developing Country Debt and the World Economy, pages 275-284 National Bureau of Economic Research, Inc.
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    9. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
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    13. Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
    14. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report, Federal Reserve Bank of Minneapolis 209, Federal Reserve Bank of Minneapolis.
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    Cited by:
    1. J. Brandes & Tobias Schüle, 2008. "IMF’s assistance: Devil’s kiss or guardian angel?," Journal of Economics, Springer, Springer, vol. 94(1), pages 63-86, 06.
    2. Eichengreen, Barry & Kletzer, Kenneth & Mody, Ashoka, 2006. "The IMF in a world of private capital markets," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1335-1357, May.
    3. Diego Saravia, 2009. "On The Role and Effects of IMF Seniority," Working Papers Central Bank of Chile, Central Bank of Chile 538, Central Bank of Chile.

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