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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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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
Date of revision:
Handle: RePEc:pra:mprapa:48896
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  1. 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.
  2. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
  3. Broner, Fernando A & Ventura, Jaume, 2006. "Globalization and Risk Sharing," CEPR Discussion Papers 5820, C.E.P.R. Discussion Papers.
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  7. 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.
  8. Axel Dreher, 2008. "IMF Conditionality: Theory and Evidence," KOF Working papers 08-188, KOF Swiss Economic Institute, ETH Zurich.
  9. 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.
  10. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
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  12. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, vol. 50(2), pages 313-335, August.
  13. Stone, Randall W., 2008. "The Scope of IMF Conditionality," International Organization, Cambridge University Press, vol. 62(04), pages 589-620, October.
  14. 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.
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  18. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
  19. 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.
  20. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  21. Frederic S. Mishkin, 2000. "Lessons from the Asian Crisis," NBER Working Papers 7102, National Bureau of Economic Research, Inc.
  22. Collier, Paul & Guillaumont, Patrick & Guillaumont, Sylviane & Gunning, Jan Willem, 1997. "Redesigning conditionality," World Development, Elsevier, vol. 25(9), pages 1399-1407, September.
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