International Monetary Fund. Programs and Capital Market Access

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.