International Monetary Fund. Programs and Capital Market Access
International Monetary Fund. Programs and Capital Market Access
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Date
2004-06-03
Authors
Saravia Tamayo, Diego
Advisor
Reinhart, Carmen
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Abstract
This thesis studies how International Monetary Fund (IMF) loans interact
with private capital flows and how they affect the level of welfare of borrower
countries and private lenders.
The first chapter presents a model highlighting the fact that the IMF has
both de jure and de facto seniority rights over private creditors. It is shown that
IMF lending affects borrowers and lenders in different ways. Ex-post, once the
initial borrowing decisions have been made, an IMF intervention always make
the borrower country better off. The effects on private lenders depend on the
size of the senior intervention and on what they expect to get in case that the
IMF does not intervene. For some parameter values, IMF interventions make
existing lenders worse off when the liquidity situation is either good or weak and
make them better off when it is in an intermediate range. This is consistent with
the empirical evidence presented in Chapter 2. The expectation of a future IMF
intervention may reduce the level of borrowing and borrowers' welfare ex-ante,
because seniority allows the IMF to lend in cases where it is not socially optimal
to do so. This effect is contrary to the moral hazard view where "too much"
rescuing leads to "too much" borrowing. Thus, the country may have incentives
to commit today not to borrow tomorrow from the IMF in the future, although
this promise is not time consistent.
The second chapter, which is a joint work with Ashoka Mody, analyzes empir-
ically if IMF programs influence the ability of developing country issuers to tap
international bond markets and whether they improve spreads paid on the bonds
issued. It is found that Fund programs do not provide a uniformly favorable
signaling effect. Instead, the evidence is most consistent with a positive e®ect of
IMF programs when they are viewed as likely to lead to policy reform and when
undertaken before economic fundamentals have deteriorated significantly. The
size of the Fund's program matters, but the credibility of a joint commitment by
the country and the IMF appears to be critical.