The IMF and the catalytic effect : do IMF agreements improve access to international financial markets?
Arabaci, Mehmet Cengiz.
Thesis (M.P.P.)--Georgetown University, 2010.; Includes bibliographical references.; Text (Electronic thesis) in PDF format. Existing studies provide little evidence supporting the claim that an IMF program increases the propensity of private investors to lend to the country concerned (i.e., the catalytic effect). In this thesis I investigate whether countries have access to loans with better conditions after an IMF agreement. In contrast to empirical studies with similar approaches, however, I study debt maturity as an important indicator of better access to international financial markets, because a higher default risk of the country is associated with a shorter maturity structure of the international lending. I conduct an empirical analysis which takes into account both the maturity and the interest rate of public and publicly guaranteed private debt.; A two stage least squares estimation method is used to avoid selection bias problems. Panel data covering 116 countries between 1984 and 2007 and two other subsets of this panel data (62 countries for the second sample and 48 countries for the third sample are selected based on the eligibility criteria to receive International Development Association (IDA)'s concessional loans) are used to test the impact of an announcement of an IMF agreement on access to international financial markets. I also control for any possible bias due to endogeneity of GDP growth when tested positive. The results indicate an improvement in access to international financial markets when an IMF program is announced.; Important policy implications can be drawn from the empirical findings of this thesis for both the IMF and borrower countries. From the IMF's perspective, the catalytic effect may lower the level of commitment, political will and "ownership" of the program of the borrower country due to increased access to international financial markets. To avoid this moral hazard, the IMF should consider designing a more flexible exit strategy, increasing cost of borrowing, or limiting access to IMF loans in consequent agreements in case of a low completion. On the other hand, borrower countries should consider the catalytic effect in determining the amount of financial assistance from the IMF; otherwise the burden of conditionality could be higher than optimal.
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