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

Abstract

One possible explanation for the unsatisfactory implementation of IMF conditionality has been attributed to the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with the negotiated conditions. In this paper we suggest that such lack of credibility might be due to the dual role played by the IMF which acts at the same time as a creditor and a monitor of economic reforms. We show that the IMF incentive to hide its surveillance failures, in order to preserve its reputation of being a good monitor, may actually distort its lending decisions towards greater laxity (relative to social optimum) in punishing non-compliance with economic reforms. We have empirically tested such theoretical result by supposing that larger departures from efficiency of the IMF lending rule are associated with a longer relationship between a country and the IMF. The longer this relationship, the stronger the IMF reputation will be affected in case it ultimately decides to stop lending. Specifically, we have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as a proxy for the duration of the relationship between the Fund and a country. Our empirical results show that a higher IMF debt share does increase IMF disbursements.

The political economy of IMF forecasts

“…15 Table 3 presents the results of the 14 When the IMF program spell is interrupted this variable goes to zero and, as soon as a new program begins (after an interval of at least one year), we start counting again. See Marchesi and Sabani (2007b), Przeworski and Vreeland (2000) and Vreeland (2003). 15 Since the hypothesis of no first-order autocorrelation is rejected by the data, we estimate a fixed effects linear models with an AR(1) disturbance.…”

“…Failure to refinance a country-particularly countries with longer histories of borrowing from the Fund-confirm the IMF's failure as a lender and a policy monitor/advisor, since this outcome is partly caused by the past advice of the IMF. The empirical results of Marchesi and Sabani (2007b) show, indeed, that a longer history of IMF lending does increase the probability of additional IMF loan disbursements. Therefore, the desire to justify its lending activity may lead the IMF to over-optimism when engaging in surveillance.…”

Read my lips: The role of information transmission in multilateral reform design

“…There are many reasons why the IMF's threat of program interruption cannot be credible. For a discussion on this see Marchesi and Sabani (2007a). 21 This is a strong assumption.…”

Geopolitics and international organizations: An empirical study on IMF facilities

“…Boughton (2004) supported the view that IMF involvement in the Eastern European countries was not purely financially driven, but rather ideological by ultimately encouraging the superiority of the market economy. In the same vein, Marchesi and Sabani (2007) show that because of the lack of credibility of the Fund, i.e. regarding the borrowing country's noncompliance with conditionality, lending may be distorted for reputation issues.…”