On US politics and IMF Lending
The political factors, which shape IMF lending to LDCs, have attracted much attention. The same goes for the role and influence of the US. However, formal modelling is scant. In this paper, we assume that the US is principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive the optimal loan allocation mechanism, and test the hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country’s bliss point and its actual policy stance measured relative to the US. We propose a bliss-point proxy and test our hypothesis in a sample of 68 countries during the period 1986-94. There is support for our hypothesis in the data. Finally, we show that omitting bliss points may lead to endogeneity bias in empirical work.
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