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IMF concern for reputation and conditional lending failure: theory and empirics

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  • Silvia Marchesi
  • Laura Sabani

Abstract

The IMF is entrusted with the twofold task of enforcing conditionality and deciding whether or not to continue financial assistance. In this paper we examine the implications on IMF lending behaviour of the existence of uncertainty about its ability to monitor governments’ actions and to enforce conditionality. It is shown that the existence of an even small degree of uncertainty about the IMF ability as a monitor generates incentives for the IMF to take actions to protect its reputation as a good monitor. In turn, this desire for reputation distorts IMF incentive to interrupt financial assistance, i.e. programmes will be interrupted less often than it would be socially desirable. We have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as an indicator of the length of the relationship between a country and the IMF. The longer their relationship, the stronger IMF reputation will be affected in case it ultimately decides to interrupt the lending. Our results show that a higher IMF debt share does increase IMF disbursements.

Suggested Citation

  • Silvia Marchesi & Laura Sabani, 2005. "IMF concern for reputation and conditional lending failure: theory and empirics," Department of Economics University of Siena 447, Department of Economics, University of Siena.
  • Handle: RePEc:usi:wpaper:447
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    More about this item

    Keywords

    IMF programmes; conditionality; incomplete information; reputation; dynamic panel;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • N2 - Economic History - - Financial Markets and Institutions

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