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A cure worse than the disease? currency crises and the output costs of IMF-supported stabilization programs

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Michael Hutchison

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Abstract

This paper investigates the output effects of IMF-supported stabilization programs, especially those introduced at the time of a severe balance of payments/currency crisis. Using a panel data set over the 1975–1997 period and covering 67 developing and emerging market economies (with 461 IMF stabilization programs and 160 currency crises), we find that currency crises—even after controlling for macroeconomic developments and political and regional factors—significantly reduce output growth for one to two years. Output growth is also lower (0.7 percentage point annually) during IMF stabilization programs, but it appears that growth generally slows prior to implementation of the program. Moreover, programs coinciding with recent balance of payments or currency crises do not appear to further damage short-run growth prospects. Countries participating in IMF programs significantly reduce domestic credit growth, but no effect is found on budget policy. Applying this model to the collapse of output in East Asia following the 1997 crisis, we find that the unexpected (forecast error) collapse of output in Malaysia—where an IMF program was not followed—was similar in magnitude to those countries adopting IMF programs (Indonesia, Korea, the Philippines, and Thailand).

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 01-02.

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Date of creation: 2001
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Handle: RePEc:fip:fedfpb:01-02

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Keywords: International Monetary Fund Money Financial crises

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Michael D. Bordo & Anna J. Schwartz, 2000. "Measuring Real Economic Effects of Bailouts: Historical Perspectives on How Countries in Financial Distress Have Fared With and Without Bailouts," NBER Working Papers 7701, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Timothy D. Lane & Steven Phillips, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  5. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  6. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank. [Downloadable!]
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  7. Axel Dreher & Roland Vaubel, 2002. "Does the IMF cause moral hazard and political business cycles? Evidence from panel data," International Finance 0207002, EconWPA. [Downloadable!]
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  8. 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)
  9. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
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  10. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March. [Downloadable!] (restricted)
  11. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar. 23. [Downloadable!]
  12. Bird, Graham, 1996. "The International Monetary Fund and Developing Countries: A Review of the Evidence and Policy Options," International Organization, MIT Press, vol. 50(3), pages 477-511, Summer.
  13. Dicks-Mireaux, Louis & Mecagni, Mauro & Schadler, Susan, 2000. "Evaluating the effect of IMF lending to low-income countries," Journal of Development Economics, Elsevier, vol. 61(2), pages 495-526, April. [Downloadable!] (restricted)
  14. Reuven Glick & Michael Hutchison, 1999. "Banking and currency crises; how common are twins?," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
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  15. Conners & Thomas A., 1979. "The apparent effects of recent IMF stabilization programs," International Finance Discussion Papers 135, Board of Governors of the Federal Reserve System (U.S.).
  16. Dooley, Michael P., 2000. "International financial architecture and strategic default: can financial crises be less painful?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 361-377, December. [Downloadable!] (restricted)
  17. Pastor, Manuel Jr., 1987. "The effects of IMF programs in the Third World: Debate and evidence from Latin America," World Development, Elsevier, vol. 15(2), pages 249-262, February. [Downloadable!] (restricted)
  18. Reuven Glick & Michael Hutchison, 2002. "Capital controls and exchange rate instability in developing economies," Pacific Basin Working Paper Series 00-05, Federal Reserve Bank of San Francisco. [Downloadable!]
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  19. Michael D. Bordo & Harold James, 2000. "The International Monetary Fund: Its Present Role in Historical Perspective," NBER Working Papers 7724, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Edwards, Sebastian, 1989. "The international monetary fund and the developing countries: A critical evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 31, pages 7-68. [Downloadable!] (restricted)
  21. Joseph P. Joyce, 2001. "Time present and time past: a duration analysis of IMF program spells," Working Papers 01-2, Federal Reserve Bank of Boston. [Downloadable!]
  22. Conway, Patrick, 1994. "IMF lending programs: Participation and impact," Journal of Development Economics, Elsevier, vol. 45(2), pages 365-391, December. [Downloadable!] (restricted)
Full references

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. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," NBER Working Papers 12235, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Simon Johnson & Todd Mitton & Kalpana Kochhar & Natalia T. Tamirisa, 2006. "Malaysian Capital Controls: Macroeconomics and Institutions," IMF Working Papers 06/51, International Monetary Fund. [Downloadable!]
  3. Nandini Gupta & Kathy Yuan, 2003. "Financial Dependence, Stock Market Liberalizations, and Growth," William Davidson Institute Working Papers Series 2003-562, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Komarek, Lubos & Melecky, Martin, 2005. "Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets," The Warwick Economics Research Paper Series (TWERPS) 735, University of Warwick, Department of Economics. [Downloadable!]
  5. Ramkishen S. Rajan & Chung-Hua Shen, 2002. "Are crisis-induced devaluations contractionary?," Pacific Basin Working Paper Series 02-06, Federal Reserve Bank of San Francisco. [Downloadable!]
  6. Cull, Robert & Effron, Laurie, 2005. "World Bank lending and financial sector development," Policy Research Working Paper Series 3656, The World Bank. [Downloadable!]
  7. Michael M. Hutchison, 2004. "Capital Utilization and the Foundations of Club Convergence," EPRU Working Paper Series 04-15, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  8. Ashoka Mody & Diego Saravia, 2005. "Catalyzing Private Capital Flows: Do IMF Programs Work as Commitment Devices?," Documentos de Trabajo 280, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  9. Ilan Noy, 2004. "Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach," Working Papers 200402, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  10. Carlos de Resende, 2007. "IMF-Supported Adjustment Programs: Welfare Implications and the Catalytic Effect," Working Papers 07-22, Bank of Canada. [Downloadable!]
  11. David Fernando López Angarita, 2006. "Nivel de reservas internacionales y riesgo cambiario en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 117-159, July-Dece. [Downloadable!]
  12. Dreher, Axel, . "The Influence of Elections on Compliance with World Bank Conditionality and IMF Program Interruptions," IVS discussion paper series 604, Institut für Volkswirtschaft und Statistik (IVS), University of Mannheim. [Downloadable!]
  13. Robert J. Barro & Jong-Wha Lee, 2002. "IMF Programs: Who is Chosen and What Are the Effects?," NBER Working Papers 8951, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Claessens, Stijn & Klingebiel, Daniela & Laeven, Luc, 2004. "Resolving systemic financial crisis : policies and institutions," Policy Research Working Paper Series 3377, The World Bank. [Downloadable!]
  15. I.Igal Magendzo, 2002. "Are Devaluations Really Contractionary?," Working Papers Central Bank of Chile 182, Central Bank of Chile. [Downloadable!]
  16. 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:
  17. Axel Dreher, 2002. "The Development and Implementation of IMF and World Bank Conditionality," International Finance 0207003, EconWPA. [Downloadable!]
  18. 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)
  19. Komarek, Lubos & Komarkova, Zlatuse & Melecky, Martin, 2005. "Current Account Reversals and Growth: The Direct Effect Central and Eastern Europe 1923-2000," The Warwick Economics Research Paper Series (TWERPS) 736, University of Warwick, Department of Economics. [Downloadable!]
  20. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing: The Role of the IMF," NBER Working Papers 10834, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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