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Does the IMF Help or Hurt? The Effect of IMF programs on the likelihood and outcome of currency crises

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Author Info
Axel Dreher () (KOF Swiss Economic Institute, ETH Zurich)
Stefanie Walter () (University of Zurich, Institute for Political Science, and ETH Zurich, Switzerland)

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Abstract

Using panel data for 68 countries over the period 1975-2002 this paper examines how IMF programs, disbursed loans, and compliance with conditionality affect the risk of currency crises and the outcome of such crises. Specifically, we investigate whether countries with previous IMF intervention are more likely to experience currency crises. In a second step, we analyze the IMF’s impact on a country’s decision to adjust the exchange rate, once a crisis occurred. We find that IMF involvement reduces the probability of a crisis. Once in a crisis, IMF programs significantly increase the probability that the authorities devalue the exchange rate. The amount of loans and compliance with conditionality have no impact. Our results suggest that the IMF – contrary to the Fund’s critics – does indeed fulfill its functions of promoting exchange rate stability and helping its members to correct macroeconomic imbalances.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-186.

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Length: 39 pages
Date of creation: Jan 2008
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Handle: RePEc:kof:wpskof:08-186

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Related research
Keywords: IMF programs; growth; compliance; conditionality;

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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