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The Role of IMF Support in Crisis Prevention

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  • Uma Ramakrishnan
  • Juan Zalduendo
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    Abstract

    This paper examines the role of IMF-supported programs in crisis prevention; specifically, whether, conditional on an episode of intense market pressures, IMF financial support helps prevent a capital account crisis from developing and, if so, through what channels. In doing so, the paper distinguishes between the seal of approval inherent in IMF support and its financing, evaluates the interaction of IMF support with economic policies, and assesses whether IMF financing has a different impact on the likelihood of a crisis than other forms of liquidity. The main result is that IMF financing helps prevent crises through the liquidity provided (i.e., money matters). However, since the effect holds even after controlling for (gross) foreign exchange reserves, stronger policies and the seal of approval under an IMFsupported program must also play a role. Finally, the results suggest that IMF financing as a crisis prevention tool is most effective for an intermediate range of economic fundamentals.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/75.

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    Length: 31
    Date of creation: 01 Mar 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/75

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    Related research

    Keywords: Balance of payments assistance; exchange rate; crisis prevention; private capital flows; private capital; capital outflows; capital flows; exchange rate regime; capital account crises; exchange rate overvaluation; foreign exchange; foreign exchange reserves; exchange reserves; capital inflows; flexible exchange rate regime; capital markets; flexible exchange rate; exchange rates; moral hazard; real effective exchange rate; exchange restrictions; capital flow; global capital markets; international capital flows; private capital inflows; current account balance; private capital markets; exchange arrangements; foreign exchange market; private investors; equilibrium exchange rate; exchange rate deviations; effective exchange rate; international capital; exchange rate arrangement; currency devaluation; fixed exchange rates; overvalued exchange rate; exchange rate arrangements; exchange rate regimes; real exchange rates;

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    References

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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. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2005. "The IMF in a World of Private Capital Markets," NBER Working Papers 11198, National Bureau of Economic Research, Inc.
    3. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing," IMF Working Papers 04/197, International Monetary Fund.
    4. Michael D. Bordo & Ashoka Mody & Nienke Oomes, 2004. "Keeping Capital Flowing: The Role of the IMF," International Finance, Wiley Blackwell, vol. 7(3), pages 421-450, December.
    5. 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.).
    6. 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.
    7. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
    8. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    9. Ashoka Mody & Diego Saravia, 2005. "Catalyzing Private Capital Flows: Do IMF Programs Work as Commitment Devices?," Documentos de Trabajo 280, Instituto de Economia. Pontificia Universidad Católica de Chile..
    10. 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.
    11. Jun Il Kim, 2006. "IMF-Supported Programs and Crisis Prevention," IMF Working Papers 06/156, International Monetary Fund.
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    Cited by:
    1. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress From Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
    2. Jun Il Kim, 2007. "Unconditional IMF Financial Support and Investor Moral Hazard," IMF Working Papers 07/104, International Monetary Fund.
    3. Jesus Gonzalez-Garcia & John Cady, 2006. "The IMF's Reserves Template and Nominal Exchange Rate Volatility," IMF Working Papers 06/274, International Monetary Fund.
    4. Pradeep Mitra & Marcelo Selowsky & Juan Zalduendo, 2010. "Turmoil at Twenty : Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 2682, October.

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