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Reputation, Debt, and Policy Conditionality

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  • Rodney Ramcharan

Abstract

In principle, international financial institutions (IFIs) can use their leverage as creditors to prompt governments to undertake policy reform. Yet such lending has been frequently linked to unsustainable debt levels and little reform. This paper illustrates how the dual roles of IFIs as purveyors of credit and monitors of reform may help explain these negative outcomes. When debt levels rise, the IFIs reforms goals may become subordinated to its creditor''s interest, compromising the enforcement of conditionality. Attracted by this prospect, malevolent governments strategically reform, enhancing their reputation in order to maintain lending and build their debt stock. Once debt levels are sufficiently large, such governments can stop policy reforms, assured that lending will continue.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/192.

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Length: 24
Date of creation: 01 Sep 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/192

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Keywords: Conditionality; Structural adjustment; Lending commitments by Fund; Economic models; foreign aid; stock of debt; debt restructuring; debt stock; debt relief; debt burden; concessional lending; policy conditionality; debt stocks; foreign aid policy; international lending; debt sustainability; debt crises; debt explosions; public debt; debt problems; central bank; public debt crises; conditional lending; structural conditionality;

References

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  1. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, vol. 75(3), pages 530-38, June.
  2. Barro, Robert J. & Lee, Jong-Wha, 2005. "IMF programs: Who is chosen and what are the effects?," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1245-1269, October.
  3. Casella, Alessandra & Eichengreen, Barry, 1996. "Can Foreign Aid Accelerate Stabilisation?," Economic Journal, Royal Economic Society, vol. 106(436), pages 605-19, May.
  4. Easterly William R., 2001. "Growth Implosions and Debt Explosions: Do Growth Slowdowns Cause Public Debt Crises?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-26, February.
  5. Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers 636, Stockholm - International Economic Studies.
  6. Paul Collier & Jan Willem Gunning, 1999. "The IMF`s role in structural adjustment," Economics Series Working Papers WPS/1999-18, University of Oxford, Department of Economics.
  7. Svensson, J., 1995. "When Is Foreign Aid Policy Credible? Aid Dependence and Conditionality," Papers 600, Stockholm - International Economic Studies.
  8. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  9. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  11. Drazen, Allan, 2002. "Conditionality and Ownership in IMF Lending: A Political Economy Approach," CEPR Discussion Papers 3562, C.E.P.R. Discussion Papers.
  12. James M. Boughton & Alex Mourmouras, 2002. "Is Policy Ownership An Operational Concept?," IMF Working Papers 02/72, International Monetary Fund.
  13. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  14. Sibert, Anne, 2001. "Monetary Policy With Uncertain Central Bank Preferences," CEPR Discussion Papers 3113, C.E.P.R. Discussion Papers.
  15. Mohsin S. Khan & Sunil Sharma, 2001. "IMF Conditionality and Country Ownership of Programs," IMF Working Papers 01/142, International Monetary Fund.
  16. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  17. Giulio Federico, 2001. "Samaritans, Rotten Kids and Policy Conditionality," Economics Series Working Papers WPS/2001-16, University of Oxford, Department of Economics.
  18. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  19. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  20. Rodney Ramcharan, 2002. "How Does Conditional Aid (Not) Work?," IMF Working Papers 02/183, International Monetary Fund.
  21. Giulio Federico, 2001. "Samaritans, Rotten Kids and Policy Conditionality," CSAE Working Paper Series 2001-16, Centre for the Study of African Economies, University of Oxford.
  22. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
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Citations

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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. Rodney Ramcharan, 2004. "Debt “Hold Up†and International Lending," Econometric Society 2004 Far Eastern Meetings 462, Econometric Society.
  3. Silvia Marchesi & Laura Sabani, 2005. "IMF concern for reputation and conditional lending failure: theory and empirics," FMG Discussion Papers dp535, Financial Markets Group.
  4. Marchesi, Silvia & Sabani, Laura, 2006. "Prolonged Use and Conditionality Failure: Investigating IMF Responsibility," Working Paper Series RP2006/11, World Institute for Development Economic Research (UNU-WIDER).
  5. Christoph A. Schaltegger & Martin Weder, 2013. "Fiscal Adjustments and the Probability of Sovereign Default," CREMA Working Paper Series 2013-06, Center for Research in Economics, Management and the Arts (CREMA).
  6. Silvia Marchesi & Emanuela Sirtori, 2011. "Is two better than one? The effects of IMF and World Bank interaction on growth," The Review of International Organizations, Springer, vol. 6(3), pages 287-306, September.
  7. Rodney Ramcharan, 2004. "Debt Hold Up and International Lending," Econometric Society 2004 North American Summer Meetings 341, Econometric Society.
  8. 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.
  9. Ruxanda Berlinschi, 2010. "Reputation concerns in aid conditionality," The Review of International Organizations, Springer, vol. 5(4), pages 433-459, December.
  10. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," Working Papers 124, University of Milano-Bicocca, Department of Economics, revised Oct 2007.
  11. Rodney Ramcharan, 2002. "How Does Conditional Aid (Not) Work?," IMF Working Papers 02/183, International Monetary Fund.

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