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IMF conditionalities, liquidity provision, and incentives for fiscal adjustment

  • Guimaraes, Bernardo
  • Iazdi, Oz

This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance towards immediate liquidity provision.

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File URL: http://mpra.ub.uni-muenchen.de/48896/1/MPRA_paper_48896.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48896.

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Date of creation: Jul 2013
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Handle: RePEc:pra:mprapa:48896
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  1. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  2. Jose Vicente Martinez and Guido Sandleris, 2008. "Is it Punishment? Sovereign Defaults and the Decline in Trade," Business School Working Papers 2008-01, Universidad Torcuato Di Tella.
  3. Juan M. Sanchez & Horacio Sapriza & Gabriel Cuadra, 2009. "Fiscal Policy and Default Risk in Emerging Markets," 2009 Meeting Papers 701, Society for Economic Dynamics.
  4. Miguel Fuentes & Diego Saravia, 2009. "Sovereing Defaulters: Do International Capital Markets Punish Them?," Working Papers Central Bank of Chile 515, Central Bank of Chile.
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  6. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," FMG Discussion Papers dp408, Financial Markets Group.
  7. Stone, Randall W., 2008. "The Scope of IMF Conditionality," International Organization, Cambridge University Press, vol. 62(04), pages 589-620, October.
  8. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  9. Axel Dreher & Nathan Jensen, 2003. "Independent Actor or Agent? An Empirical Analysis of the impact of US interests on IMF Conditions," International Finance 0310004, EconWPA, revised 08 Jan 2004.
  10. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," EUI-RSCAS Working Papers 18, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  11. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  12. William Easterly, 2002. "What did Structural Adjustment Adjust? The Association of Policies and Growth with Repeated IMF and World Bank Adjustment Loans," Working Papers 11, Center for Global Development.
  13. Gonçalves, Carlos Eduardo & Guimaraes, Bernardo, 2015. "Sovereign default risk and commitment for fiscal adjustment," Journal of International Economics, Elsevier, vol. 95(1), pages 68-82.
  14. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  15. Collier, Paul & Guillaumont, Patrick & Guillaumont, Sylviane & Gunning, Jan Willem, 1997. "Redesigning conditionality," World Development, Elsevier, vol. 25(9), pages 1399-1407, September.
  16. Nooruddin, Irfan & Simmons, Joel W., 2006. "The Politics of Hard Choices: IMF Programs and Government Spending," International Organization, Cambridge University Press, vol. 60(04), pages 1001-1033, October.
  17. Dreher, Axel & Jensen, Nathan M, 2007. "Independent Actor or Agent? An Empirical Analysis of the Impact of U.S. Interests on International Monetary Fund Conditions," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 105-24, February.
  18. Axel Dreher, 2009. "IMF conditionality: theory and evidence," Public Choice, Springer, vol. 141(1), pages 233-267, October.
  19. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  20. Lizarazo, Sandra, 2010. "Default Risk and Risk Averse International Investors," MPRA Paper 20794, University Library of Munich, Germany.
  21. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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