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Reputation, Debt, and Policy Conditionality

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  • Rodney Ramcharan

Abstract

In principle, international financial institutions (IFIs) can use their leverage as creditors to prompt governments to undertake policy reform. Yet such lending has been frequently linked to unsustainable debt levels and little reform. This paper illustrates how the dual roles of IFIs as purveyors of credit and monitors of reform may help explain these negative outcomes. When debt levels rise, the IFIs reforms goals may become subordinated to its creditor's interest, compromising the enforcement of conditionality. Attracted by this prospect, malevolent governments strategically reform, enhancing their reputation in order to maintain lending and build their debt stock. Once debt levels are sufficiently large, such governments can stop policy reforms, assured that lending will continue.

Suggested Citation

  • Rodney Ramcharan, 2003. "Reputation, Debt, and Policy Conditionality," IMF Working Papers 03/192, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:03/192
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marchesi, Silvia & Sabani, Laura, 2007. "IMF concern for reputation and conditional lending failure: Theory and empirics," Journal of Development Economics, Elsevier, vol. 84(2), pages 640-666, November.
    2. Christoph A. Schaltegger & Martin Weder, 2015. "Fiscal Adjustments and the Probability of Sovereign Default," Kyklos, Wiley Blackwell, vol. 68(1), pages 81-110, February.
    3. Ruxanda Berlinschi, 2010. "Reputation concerns in aid conditionality," The Review of International Organizations, Springer, vol. 5(4), pages 433-459, December.
    4. 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.
    5. Candel-Sánchez Francisco, 2014. "Incentives for Conditional Aid Effectiveness," Journal of Globalization and Development, De Gruyter, vol. 5(1), pages 1-28, June.
    6. 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.
    7. Rodney Ramcharan, 2004. "Debt “Hold Up†and International Lending," Econometric Society 2004 Far Eastern Meetings 462, Econometric Society.
    8. 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).
    9. Axel Dreher & Silvia Marchesi & James Raymond Vreeland, 2007. "The Politics of IMF Forecasts," KOF Working papers 07-176, KOF Swiss Economic Institute, ETH Zurich.
    10. Rodney Ramcharan, 2004. "Debt Hold Up and International Lending," Econometric Society 2004 North American Summer Meetings 341, Econometric Society.
    11. Rodney Ramcharan, 2002. "How Does Conditional Aid (Not) Work?," IMF Working Papers 02/183, International Monetary Fund.
    12. 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.

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