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IMF concern for reputation and conditional lending failure: theory and empirics

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  • Marchesi, Silvia
  • Sabani, Laura

Abstract

One possible explanation for the unsatisfactory implementation of IMF conditionality has been attributed to the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with the negotiated conditions. In this paper we suggest that such lack of credibility might be due to the dual role played by the IMF which acts at the same time as a creditor and a monitor of economic reforms. We show that the IMF incentive to hide its surveillance failures, in order to preserve its reputation of being a good monitor, may actually distort its lending decisions towards greater laxity (relative to social optimum) in punishing non-compliance with economic reforms. We have empirically tested such theoretical result by supposing that larger departures from efficiency of the IMF lending rule are associated with a longer relationship between a country and the IMF. The longer this relationship, the stronger the IMF reputation will be affected in case it ultimately decides to stop lending. Specifically, we have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as a proxy for the duration of the relationship between the Fund and a country. Our empirical results show that a higher IMF debt share does increase IMF disbursements.

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  • Marchesi, Silvia & Sabani, Laura, 2005. "IMF concern for reputation and conditional lending failure: theory and empirics," LSE Research Online Documents on Economics 24648, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:24648
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    Cited by:

    1. Marchesi, Silvia & Sabani, Laura & Dreher, Axel, 2011. "Read my lips: The role of information transmission in multilateral reform design," Journal of International Economics, Elsevier, vol. 84(1), pages 86-98, May.
    2. Silvia Marchesi & Laura Sabani & Axel Dreher, 2009. "Agency and Communication in IMF Conditional Lending: Theory and Empirical Evidence," Working Papers 79, Sapienza University of Rome, CIDEI.
    3. Dreher, Axel & Voigt, Stefan, 2011. "Does membership in international organizations increase governments' credibility? Testing the effects of delegating powers," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 326-348, September.
    4. Aidt, Toke & Albornoz, Facundo & Gassebner, Martin, 2010. "The Golden Halo and Political Transitions," Proceedings of the German Development Economics Conference, Hannover 2010 48, Verein für Socialpolitik, Research Committee Development Economics.
    5. Reynaud, Julien & Vauday, Julien, 2008. "IMF lending and geopolitics," Working Paper Series 965, European Central Bank.
    6. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
    7. Silvia Marchesi & Laura Sabani, 2005. "Prolonged Use and Conditionality Failure: Investigating the IMF Responsibility," Development Working Papers 202, Centro Studi Luca d'Agliano, University of Milano.
    8. Reynaud, Julien & Vauday, Julien, 2009. "Geopolitics and international organizations: An empirical study on IMF facilities," Journal of Development Economics, Elsevier, vol. 89(1), pages 139-162, May.
    9. Marchesi, Silvia & Sabani, Laura, 2006. "Prolonged Use and Conditionality Failure: Investigating IMF Responsibility," WIDER Working Paper Series 011, World Institute for Development Economic Research (UNU-WIDER).
    10. Spiros Bougheas & Indraneel Dasgupta & Oliver Morrissey, 2011. "Repayment versus Investment Conditions and Exclusivity in Lending Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(2), pages 247-265, June.
    11. Alice Sindzingre, 2016. "'Policy Externalisation' Inherent Failure: International Financial Institutions' Conditionality in Developing Countries," CEsA Working Papers 142, CEsA - Center for African, Asian and Latin American Studies.
    12. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," KOF Working papers 07-176, KOF Swiss Economic Institute, ETH Zurich.
    13. Rune Hagen, 2012. "Certified or branded?," The Review of International Organizations, Springer, vol. 7(2), pages 203-230, June.
    14. Maria Cipollina, 2007. "The developing countries’ foreign debt in the last twenty years," QA - Rivista dell'Associazione Rossi-Doria, Associazione Rossi Doria, issue 3, July.
    15. Marchesi, Silvia & Missale, Alessandro, 2013. "Did High Debts Distort Loan and Grant Allocation to IDA Countries?," World Development, Elsevier, vol. 44(C), pages 44-62.
    16. Axel Dreher & Stefan Voigt, 2008. "Does Membership in International Organizations Increase Governments’ Credibility? Testing the Effects of Delegating Powers," CESifo Working Paper Series 2285, CESifo Group Munich.
    17. Ruxanda Berlinschi, 2010. "Reputation concerns in aid conditionality," The Review of International Organizations, Springer, vol. 5(4), pages 433-459, December.
    18. repec:got:cegedp:86 is not listed on IDEAS
    19. Silvia Marchesi & Emanuela Sirtori, 2011. "Is two better than one? The effects of IMF and World Bank interaction on growth," The Review of International Organizations, Springer, vol. 6(3), pages 287-306, September.
    20. Axel Dreher & Jan-Egbert Sturm, 2012. "Do the IMF and the World Bank influence voting in the UN General Assembly?," Public Choice, Springer, vol. 151(1), pages 363-397, April.
    21. ORASTEAN Ramona, 2014. "The Lending Arrangements Of The Imf In European Union In Times Of Crisis – Characteristics And Evolutions," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 9(1), pages 134-141, April.

    More about this item

    Keywords

    IMF programmes; Conditionality; Incomplete information; Reputation; Dynamic panel.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • N2 - Economic History - - Financial Markets and Institutions

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