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Stigma or cushion? IMF programs and sovereign creditworthiness

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  • Gehring, Kai
  • Lang, Valentin

Abstract

Policymakers in crisis countries often hesitate to enter IMF programs out of the fear that they trigger adverse reactions on financial markets. We explain why credit ratings and investor assessments are reliable measures of creditworthiness during crises, and examine how IMF programs affect them with three distinct identification strategies. The first strategy exploits the differential effect of changes in IMF liquidity on loan allocation as an instrument, the second uses the exact timing of program agreements, and the third provides text-based evidence from rating agency statements. When accounting for endogenous selection, we find that IMF programs help countries regain their creditworthiness. Even though IMF programs tend to result in economic contractions, the agreement on a program is perceived as a positive signal on financial markets. Our text-based analysis supports this signaling effect and suggests that the content of programs matters for how they are perceived.

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  • Gehring, Kai & Lang, Valentin, 2020. "Stigma or cushion? IMF programs and sovereign creditworthiness," Journal of Development Economics, Elsevier, vol. 146(C).
  • Handle: RePEc:eee:deveco:v:146:y:2020:i:c:s0304387820300821
    DOI: 10.1016/j.jdeveco.2020.102507
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    4. Marchesi, Silvia & Masi, Tania & Paul, Saumik, 2021. "Project Aid and Firm Performance," IZA Discussion Papers 14705, Institute of Labor Economics (IZA).
    5. Silvia Marchesi & Pietro Bomprezzi, 2021. "A firm level approach on the e¤ects of IMF programs," Working Papers 476, University of Milano-Bicocca, Department of Economics, revised Aug 2021.
    6. Chungshik Moon & Byungwon Woo, 2022. "Curse of friendship: IMF programme, friendship with the United States and foreign direct investment," The World Economy, Wiley Blackwell, vol. 45(7), pages 2188-2221, July.
    7. Gehring, Kai & Kaplan, Lennart C. & Wong, Melvin H.L., 2022. "China and the World Bank—How contrasting development approaches affect the stability of African states," Journal of Development Economics, Elsevier, vol. 158(C).
    8. Lang, Valentin & Mihalyi, David & Presbitero, Andrea, 2021. "Borrowing Costs after Sovereign Debt Relief," CEPR Discussion Papers 15832, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Financial crises; Capital market access; IMF;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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