Adverse selection and growth under IMF programs

Bas, Muhammet Ali; Stone, Randall W.

doi:10.1007/s11558-013-9173-1

Cited by 47 publications

(24 citation statements)

References 34 publications

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“…In terms of economic fundamentals, the focus of many such studies has been on economic growth. While some studies find a positive (Bas and Stone 2014) or insignificant (Atoyan and Conway 2006) relationship between IMF programs and growth, the majority of empirical studies suggest immediate negative effects (Barro and Lee 2005;Dreher 2006;Easterly 2005;Marchesi and Sirtori 2011;Przeworkski and Vreeland 2000). Beyond growth, monetary stability, debt management and the containment of external arrears are key goals of IMF programs (Kentikelenis, Stubbs, and King 2016).…”

Section: Adjustment Effectsmentioning

confidence: 99%

“…For these reasons, the Fund's engagement can positively affect expectations about the reforms' effects on sustainability and macroeconomic performance (Edwards 2006;Mody and Saravia 2006;Corsetti et al 2006;Morris and Shin 2006). 3 On the other hand, IMF programs may convey negative information (Andone and Scheubel 2017;Bas and Stone 2014;Ito 2012). If IMF programs are perceived as indicating that the country's financial problems are more severe than official indicators suggest, they can act as a negative signal.…”

Section: Signaling Effectsmentioning

confidence: 99%

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Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

Gehring

Lang

2018

SSRN Journal

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IMF programs are often considered to carry a "stigma" that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country's access to financial markets, we use credit ratings and investor assessments for 100 countries from 1987 to 2013. Our first identification strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can "cushion" against falling creditworthiness, despite contractionary adjustments resulting from its programs. A second, event-based strategy using country-times-year fixed effects supports this positive signaling effect. A supplementary text analysis of rating statements validates that agencies perceive IMF programs as positive, particularly when they are associated with reform commitments.

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Section: Adjustment Effectsmentioning

confidence: 99%

Section: Signaling Effectsmentioning

confidence: 99%

Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

Gehring

Lang

2018

SSRN Journal

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“…A large body of quantitative research is devoted to understanding the consequences of IMF programs (Abouharb and Cingranelli 2009;Bas and Stone 2014;Dreher 2006;Nelson and Wallace 2017;Nooruddin and Simmons 2006;Oberdabernig 2013;Stubbs et al 2016). Most of this work has relied on a broad-brush binary indicator for whether or not a country is under a Fund program in a given year as a measure of the organization's engagement-plugging it into regression models and using it to differentiate control and treatment groups.…”

Section: Introductionmentioning

confidence: 99%

How to evaluate the effects of IMF conditionality

et al. 2018

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Following calls for a more disaggregated approach to studying the consequences of IMF programs, scholars have developed new datasets of IMF-mandated policy reforms, or 'conditionality.' Initial studies have explored how conditions have, inter alia, affected tax revenues, public sector wages, and health systems. Notwithstanding the important contributions of these studies, a methodological quandary arises as to how to quantitatively examine the effects of conditionality, as distinct from other aspects of IMF operations (e.g., credit, technical support, or aid and investment catalysis). In this article, we review and advance these methodological debates by developing an identification strategy for addressing the multiple endogenous components of IMF programs. We begin by surveying the main strategies for studying the effects of IMF programs: matching methods, instrumental variable approaches, system GMM estimation, and variants of Heckman estimators. We then adapt these methods for studying the effects of conditionality per se. Specifically, we utilize a compound instrumental variable design over a system of three equations to address sources of endogeneity related to, first, the IMF participation decision and, second, the conditions included within the program. In Monte Carlo simulations, we demonstrate that our approach is unbiased and performs better than alternatives on standard diagnostics across a range of scenarios. Finally, we apply these methods to investigate how IMF programs impact government education spending as a share of GDP on a sample of 132 developing countries for the period 1990 to 2014, finding exposure to an additional condition results in a 0.05 percentage point decline.

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“…We account for a possible endogenous relationship between countries under World Bank PL and worsened rates of economic growth using an instrumental variable approach. In doing so, we follow the approach of studies that examined the impact of IMF lending on economic growth (Atoyan and Conway 2006;Bas and Stone 2014;Dreher 2006;Przeworski and Vreeland 2000;Vreeland 2003).…”

Section: Methodsmentioning

confidence: 99%

“…6 We are careful to include country, regional, and time fixed effects to limit the bias on our results from particular national economic shocks and regional economic changes, for example the 1997-1999 Asian financial crisis, as well as global economic changes such as the 2008 and 2009 recessions. In a recent study, Bas and Stone (2014) argue that countries that are more interested in participating in IMF programs are the least likely to have favorable growth outcomes. Their hypothesis, based on an adverse selection model, could also be tested in future studies in the context of World Bank PL.…”

Section: World Bank Institutional Reforms In the Late 1990smentioning

confidence: 99%

Economic Development and the World Bank

Abouharb

Duchesne

2019

Social Sciences

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We contribute to the research stream examining the effects of World Bank lending programs on economic growth in developing economies. We contend that it is important to distinguish between the short-term effects and extended exposure of countries to these lending programs and also to assess the Bank’s (late 1990s) reforms to improve the effectiveness of these programs in recipient countries to assess whether program lending has any positive impacts on economic growth. Our comparative cross-national findings using instrumental variables analysis to control for endogeneity between program participation and economic growth demonstrate that both the short-term and longer exposure to program lending worsens economic growth. We find no evidence that World Bank reforms improved economic growth rates in the post-reform (1999–2009) period. Our findings are robust to changes in model specifications and estimation techniques. Future research should examine whether these reforms had beneficial impacts in other societal areas affected by program lending.

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Adverse selection and growth under IMF programs

Cited by 47 publications

References 34 publications

Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

How to evaluate the effects of IMF conditionality

Economic Development and the World Bank

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