Catalysing private capital flows and IMF programs: some remaining questions

Abstract

In a 2005 article in this journal, Genberg poses the question of whether countries with IMF programs have “privileged access” to international capital markets. In attempting to answer this question, he cautions about reading too much into some of the recent literature. In this paper, we briefly examine the so-called catalytic effect in a way that attempts to overcome some of his concerns. Our results suggest that it is unwise to place too much emphasis on any set of specific results that may not be generalized or robust across different methodologies and different types of capital flows.capital flows, IMF,

IMF‐Supported Programmes: Stimulating Capital to Non‐defaulting Countries

“…Moreover, the final column of Table 4 shows the results when including all IMF programmes but excluding the year fixed effects. Bird and Rowlands (2008, 2009) use this type of set‐up and find a negative and statistically insignificant effect of IMF programmes on total private capital flows in their full sample 18 . Indeed, the estimate for IMF programmes now turns negative.…”

“…18 18 Bird and Rowlands (2008) also find a negative and statistically significant effect of IMF programmes on total private capitals in medium and highly indebted middle‐income countries. …”

“…Bird and Rowlands (2002, 2008, 2009), in particular, cast doubt on the catalytic effect of IMF programmes. In their 2008 contribution, they estimate total private capital flows, account for sample selectivity and examine how the economic conditions of countries affect catalysis, but find no grounds for catalytic conversion.…”

“…Similarly, Bird (2007, p. 734) observes that ‘the evidence certainly implies that it is misplaced to rely on the Fund catalysing private capital markets to lend’. Indeed, it is often argued that Fund programmes signal payment difficulties, increasing spreads and triggering private capital outflows (Őzler, 1993; Bird and Rowlands, 2002, 2008, 2009; Jensen, 2004; Edwards, 2006).…”

External Macroeconomic Imbalances and Foreign Direct Investment Inflows to Developing Countries

“…Theoretical work in catalytic finance typically models an IMF intervention as sending mixed signals that can impact private capital flows. While Cottarelli and Giannini () dismiss the possibility of negative signals inherent in IMF interventions and recognize only their catalytic relevance, Bird and Rowlands (, , ) and Edwards () argue that such interventions may signal the likelihood of default causing several imbalances with the possibility of increasing capital flight (outflows) from the crisis countries.…”