Evaluating the Impact of Non-Financial IMF Programs Using the Synthetic Control Method

Abstract

We use the Synthetic Control Method to study the effect of IMF advice on economic growth, inflation, and investment. The analysis exploits the existence of IMF programs that do not involve any financing (Policy Support Instruments, "PSIs"). This enables us to focus on the effects of IMF monitoring, advice, and approval (as opposed to direct financial assistance). In addition, countries with non-financial programs are typically not crisis-struck-thereby mitigating the reverse causality problem and facilitating the construction of counterfactuals. Results suggest that treated countries add about 1 percentage point in annual real GDP per capita growth, with inflation being lower by some 3 percentage points per year. While we do not find evidence for an impact on total investment and the resulting capital stock, PSItreatment does seem to stimulate foreign direct investment.

The IMF and precautionary lending: An empirical evaluation of the selectivity and effectiveness of the Flexible Credit Line

“…48 A recent study by Newiak and Willems (2017) applies the same methodology to evaluate the impact of Policy Support Instruments (PSIs), non-disbursing IMF instruments whose main purpose is to signal to investors (and donors) the IMF's endorsement of the participating countrys policies, on growth, inflation and investment in seven African PSI countries. This enables Newiak and Willems (2017) to isolate the contribution of IMF involvement (through advice, monitoring and approval) from the effects of direct financial assistance. Since there have been no disbursements under the FCL arrangements either and given the FCLs stated goal of boosting market confidence, our analysis can be seen in a similar light (although, unlike a PSI, an FCL does imply direct access to financial assistance if needed).…”

“…In other words, we look for the V that delivers the best fit between the path of outcomes for the FCL country and for the synthetic control before the FCL arrangement was agreed upon. 50 To facilitate comparison of the various synthetic control experiments we conduct across countries and outcome variables we employ a normalised 'fit index', as suggested by Adhikari and Alm (2016) and Newiak and Willems (2017):…”

Expenditure Conditionality in IMF-supported Programs

“…Bal-Gunduz and others (2013) find support for this result and highlight advantages to LIDCs from a long-term engagement with the IMF in the context of programs. Newiak and Willems (2017) apply a synthetic control methodology on a handful of countries and find that even an IMF-monitored program with no financing helped promote growth and foreign direct investment, and lower inflation in these economies. Atoyan and Conway (2006) employ both instrumental variable and propensity score matching techniques and conclude that a country's economic growth does not benefit contemporaneously from participating in IMF programs but it picks up after the conclusion of program.…”

Real Exchange Rate Misalignments: The Case of the Indonesian Rupiah

“…The pre-treatment fit index of Adhikari and Alm (2016) and are used to assess whether the synthetic control makes a good counterfactual (Newiak and Willems, 2017). The pre-treatment fit index is formulated as follows:…”