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IMF Lending and Banking Crises

Listed author(s):
  • Luca Papi Author-Name-First Luca

    ()

    (Polytechnic University of Marche)

  • Andrea F. Presbitero

    ()

    (Polytechnic University of Marche)

  • Alberto Zazzaro

    ()

    (Polytechnic University of Marche)

In this paper we look at the effect of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1965-2010. The endogeneity of the Fund intervention is addressed by adopting an instrumental variable (IV) strategy, in which the degree of political similarity between IMF borrowers and the G-7 is taken as an instrument for the likelihood of a country signing an IMF lending arrangement. Controlling for the standard determinants of banking crises, the IV estimates suggest that previous IMF borrowers are significantly less likely to experience a banking crisis. We also provide evidence suggesting that compliance with conditionality matters, consistent with the importance of IMF-supported financial reform, and that the positive effect of the Fund intervention on banking sector stability works through a direct liquidity provision effect.

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Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1304.

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Date of creation: 2013
Handle: RePEc:lui:casmef:1304
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