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The Effect of IMF Lending on the Probability of Sovereign Debt Crises

  • Markus Jorra

    ()

    (University of Giessen)

This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We nd that IMF programs signifcantly increase the probability of subsequent sovereign defaults by approximately 1.5 to 2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by speci cations that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to scal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the e ects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible.

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File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/26-2010_jorra.pdf
File Function: First version, 2010
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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number 201026.

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Length: 32 pages
Date of creation: 2010
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:magkse:201026
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