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Does the IMF cause moral hazard and political business cycles? Evidence from panel data

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Author Info
Dreher, Axel
Vaubel, Roland (Institut für Volkswirtschaft und Statistik (IVS))

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Abstract

Using panel data for 106 countries in 1971 - 1997, we estimate generalized least squares regressions to explain IMF lending as well as monetary and fiscal policies in the recipient countries. With respect to moral hazard, we find that a country`s rate of monetary expansion and its government budget deficit is higher the less it has exhausted its borrowing potential in the Fund and the more credit it has recieved from the Fund. As for political business cycles, our evidence indicates that, even with a considerable number of control variables, IMF credits in the more democratic recipient countries are larger in pre-election and post-election years. Thus, IMF lending seems to faciliate the generation of political business cycles, while IMF conditionality may serve as a scapegoat for unpopular corrective measures after the election. The paper concludes with implications for IMF reform.

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Paper provided by Institut für Volkswirtschaft und Statistik (IVS), University of Mannheim in its series IVS discussion paper series with number 598.

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Handle: RePEc:mea:ivswpa:598

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Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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References listed on IDEAS
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.:
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    Other versions:
  2. Schuknecht, Ludger, 1996. "Political Business Cycles and Fiscal Policies in Developing Countries," Kyklos, Blackwell Publishing, vol. 49(2), pages 155-70.
  3. Timothy D. Lane & Steven Phillips, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
  4. Joyce, Joseph P., 1992. "The economic characteristics of IMF program countries," Economics Letters, Elsevier, vol. 38(2), pages 237-242, February. [Downloadable!] (restricted)
  5. Jurg Niehans, 1985. "International debt with unenforceable claims," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 64-79. [Downloadable!]
  6. Dreher, Axel & Vaubel, Roland, . "Does the IMF cause moral hazard and political business cycles? Evidence from panel data," IVS discussion paper series 598, Institut für Volkswirtschaft und Statistik (IVS), University of Mannheim. [Downloadable!]
    Other versions:
  7. Douglas W. Diamond & Raghuram G. Rajan, . "Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications."," CRSP working papers 518, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    Other versions:
  8. Putnam, Robert D, 1988. "Diplomacy and Domestic Politics: The Logic of Two-Level Games," International Organization, MIT Press, vol. 42(3), pages 427-60, Summer.
  9. 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)
  10. Sebastian Edwards & Julio Santaella, 1993. "Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 405-460 National Bureau of Economic Research, Inc. [Downloadable!]
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  11. Bird, Graham & Orme, Timothy, 1981. "An analysis of drawings on the international monetary fund by developing countries," World Development, Elsevier, vol. 9(6), pages 563-568, June. [Downloadable!] (restricted)
  12. Schuknecht, Ludger, 2000. " Fiscal Policy Cycles and Public Expenditure in Developing Countries," Public Choice, Springer, vol. 102(1-2), pages 115-30, January. [Downloadable!] (restricted)
  13. Knight, Malcolm & Santaella, Julio A., 1997. "Economic determinants of IMF financial arrangements," Journal of Development Economics, Elsevier, vol. 54(2), pages 405-436, December. [Downloadable!] (restricted)
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  16. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November. [Downloadable!] (restricted)
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  17. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June. [Downloadable!]
  18. Conway, Patrick, 1994. "IMF lending programs: Participation and impact," Journal of Development Economics, Elsevier, vol. 45(2), pages 365-391, December. [Downloadable!] (restricted)
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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. 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!]
  2. Silvia Marchesi & Laura Sabani, 2005. "IMF concern for reputation and conditional lending failure: theory and empirics," Department of Economics University of Siena 447, Department of Economics, University of Siena. [Downloadable!]
    Other versions:
  3. Axel Dreher & Roland Vaubel, 2002. "Does the IMF cause moral hazard and political business cycles? Evidence from panel data," International Finance 0207002, EconWPA. [Downloadable!]
    Other versions:
  4. 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!]
  5. Axel Dreher, 2002. "The Development and Implementation of IMF and World Bank Conditionality," International Finance 0207003, EconWPA. [Downloadable!]
    Other versions:
  6. Michael M. Hutchison, . "A Cure Worse Than The Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," EPRU Working Paper Series 01-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  7. Boockmann, Bernhard & Dreher, Axel, 2002. "The Contribution of the IMF and the World Bank to Economic Freedom," ZEW Discussion Papers 02-18, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  8. Francisco José Veiga, 2002. "IMF arrangements, politics and the timing of stabilizations," NIPE Working Papers 2/2002, NIPE - Universidade do Minho. [Downloadable!]
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