IMF Lending Programs: A Signal to Invest?

Abstract

This paper seeks to reexamine the empirical evidence supporting the theory that the IMF induces private capital inflows to countries that participate in IMF programs; a concept also known as "catalytic official finance". Considering data from 101 low- and middle-income countries between 1980 and 2010, I find that the Fund does not provide a consistent catalytic effect for private investment, but rather only for certain types of capital flows. In particular, evidence suggests that IMF catalytic official finance is positive and significant with regards to portfolio equity flows; while there is no conclusive evidence to suggest that IMF lending programs impact foreign direct investment in any significant way, positively or negatively. These results provide important insights for IMF program development so it may better serve its membership and fulfill its mandate to oversee the stability of the international monetary system.