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IMF concern for reputation and conditional lending failure: theory and empirics

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Silvia Marchesi
Laura Sabani

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Abstract

One possible explanation for the unsatisfactory implementation of IMF conditionality has been attributed to the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with the negotiated conditions. In this paper we suggest that such lack of credibility might be due to the dual role played by the IMF which acts at the same time as a creditor and a monitor of economic reforms. We show that the IMF incentive to hide its surveillance failures, in order to preserve its reputation of being a good monitor, may actually distort its lending decisions towards greater laxity (relative to social optimum) in punishing non-compliance with economic reforms. We have empirically tested such theoretical result by supposing that larger departures from efficiency of the IMF lending rule are associated with a longer relationship between a country and the IMF. The longer this relationship, the stronger the IMF reputation will be affected in case it ultimately decides to stop lending. Specifically, we have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as a proxy for the duration of the relationship between the Fund and a country. Our empirical results show that a higher IMF debt share does increase IMF disbursements.

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp535.

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Date of creation: Apr 2005
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Handle: RePEc:fmg:fmgdps:dp535

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  4. Axel Dreher & Jan-Egbert Sturm, 2006. "Do IMF and World Bank Influence Voting in the UN General Assembly?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October. [Downloadable!] (restricted)
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  7. Silvia Marchesi & Laura Sabani, 2005. "Prolonged Use and Conditionality Failure: Investigating the IMF Responsibility," Development Working Papers 202, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
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  15. Easterly, William, 2005. "What did structural adjustment adjust?: The association of policies and growth with repeated IMF and World Bank adjustment loans," Journal of Development Economics, Elsevier, vol. 76(1), pages 1-22, February. [Downloadable!] (restricted)
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  16. Joseph P. Joyce, 2006. "Promises Made, Promises Broken: A Model Of Imf Program Implementation," Economics and Politics, Blackwell Publishing, vol. 18(3), pages 339-365, November. [Downloadable!] (restricted)
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  1. Silvia Marchesi & Laura Sabani & Axel Dreher, 2009. "Read my Lips: the Role of Information Transmission in multilateral reform design," Development Working Papers 274, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
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  2. Axel Dreher & Stefan Voigt, 2008. "Does Membership in International Organizations Increase Governments’ Credibility? Testing the Effects of Delegating Powers," Working papers 08-193, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
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  3. Silvia Marchesi & Laura Sabani, 2005. "Prolonged Use and Conditionality Failure: Investigating the IMF Responsibility," Development Working Papers 202, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
  4. Silvia Marchesi & Laura Sabani & Axel Dreher, 2009. "Agency and communication in IMF conditional lending: theory and empirical evidence," Working Papers 151, University of Milano-Bicocca, Department of Economics, revised Feb 2009. [Downloadable!]
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  5. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October. [Downloadable!] (restricted)
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