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

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  • Axel Dreher

    (University of Mannheim)

  • Roland Vaubel

    (University of Mannheim)

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 received from the Fund. Moreover, the budget deficit is shown to be larger the higher the interest subsidy offered by the IMF. 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 facilitate 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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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0207002.

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Date of creation: 24 Jul 2002
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Handle: RePEc:wpa:wuwpif:0207002

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Keywords: IMF programs; political business cycles; moral hazard;

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References

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  9. Faini, Riccardo & De Melo, Jaime & Senhadji-Semlali, Abdel & Stanton, Julie, 1989. "Macro performance under adjustment lending," Policy Research Working Paper Series 190, The World Bank.
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Citations

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Cited by:
  1. 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.
  2. 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.
  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. Jan-Egbert Sturm & Helge Berger & Jakob de Haan, 2005. "Which Variables Explain Decisions On Imf Credit? An Extreme Bounds Analysis," Economics and Politics, Wiley Blackwell, vol. 17, pages 177-213, 07.
  5. Michael Hutchison, 2003. "A Cure Worse Than the Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 321-360 National Bureau of Economic Research, Inc.
  6. Francisco José Veiga, 2002. "IMF arrangements, politics and the timing of stabilizations," NIPE Working Papers 2/2002, NIPE - Universidade do Minho.
  7. Axel Dreher, 2002. "The Development and Implementation of IMF and World Bank Conditionality," International Finance 0207003, EconWPA.
  8. Fratzscher, Marcel & Reynaud, Julien, 2011. "IMF surveillance and financial markets--A political economy analysis," European Journal of Political Economy, Elsevier, vol. 27(3), pages 405-422, September.
  9. Jean-Pierre Allegret & Philippe Dulbecco, 2007. "The institutional failures of International Monetary Fund conditionality," The Review of International Organizations, Springer, vol. 2(4), pages 309-327, December.

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