Agency and communication problems in IMF conditional lending

The combination of special interest politics (agency problems) and informational asymmetries presents serious problems as the implementation of Fund conditionality is concerned. In this paper we focus on the role that the transmission of information between the IMF and the borrowing government has for the design of the most e??cient "incentive contract." Specifically, we find that when agency problems are especially severe, and/or IMF information is very valuable, a centralized control is indeed optimal (conventional conditionality). To the contrary, when local knowledge is more important than the agency bias we expect delegation (ownership) to be the optimal incentive scheme.IMF conditionality, delegation, communication

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

The IMF is entrusted with the twofold task of enforcing conditionality and deciding whether or not to continue financial assistance. In this paper we examine the implications on IMF lending behaviour of the existence of uncertainty about its ability to monitor governments’ actions and to enforce conditionality. It is shown that the existence of an even small degree of uncertainty about the IMF ability as a monitor generates incentives for the IMF to take actions to protect its reputation as a good monitor. In turn, this desire for reputation distorts IMF incentive to interrupt financial assistance, i.e. programmes will be interrupted less often than it would be socially desirable. We have empirically investigated whether IMF disbursements are affected by the IMF own share of debt, which is taken as an indicator of the length of the relationship between a country and the IMF. The longer their relationship, the stronger IMF reputation will be affected in case it ultimately decides to interrupt the lending. Our results show that a higher IMF debt share does increase IMF disbursements.IMF programmes, conditionality, incomplete information, reputation, dynamic panel

Prolonged Use and Conditionality Failure: Investigating the IMF Responsibility

Prolonged use of Fund resources has consistently expanded since the 1970s among both lowincome and middle-income countries. Overall this phenomenon suggests a lack of effectiveness of Fund supported programs. Such conditionality failure has been explained by the literature by looking both at the characteristics of the borrowing countries and at the lack of credibility of the IMF threat of interrupting financial assistance in case of non compliance with conditionality. In this paper we suggest that such lack of credibility might be attributed to the dual role played by the IMF, which acts at the same time as a creditor and as a monitor (or as an advisor) of economic reforms. We show that the Fund desire to hide its surveillance failures, in order to preserve its reputation of being a good monitor/advisor, may actually distort its lending decisions towards greater laxity in punishing non-compliance with economic reforms. Such laxity may be exacerbated by the length of the relationship between a country and the Fund. Thus we claim that prolonged use of IMF resources is not only a consequence of a lack of effectiveness of adjustment lending but it might itself be a determinant of conditionality failure.IMF conditionality, incomplete information, reputation

Prolonged Use and Conditionality Failure: Investigating IMF Responsibility

IMF conditionality, incomplete information, reputation

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

In this paper we suggest that the dual role played by the IMF, as a creditor and as a monitor of economic reforms, might explain the lack of credibility of the Fund threat of sanctioning non-compliance with conditionality. Specifically, we show that the IMF desire to preserve its reputation as a good monitor may distort its lending decisions towards some laxity. Moreover, such distortionary incentives may be exacerbated by the length of the relationship between a country and the Fund. Estimating a dynamic panel of 53 middle-income countries, for the period 1982-2001, we find that a longer relationship does increase IMF disbursements.IMF programmes, conditionality, incomplete information, reputation, dynamic panel

Agency and Communication in IMF Conditional Lending: Theory and Empirical Evidence

We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory.communication, delegation, IMF conditionality, panel data

Agency and communication in IMF conditional lending: theory and empirical evidence

The combination of special interest politics (agency problems) and informational asymmetries presents serious problems as the implementation of conditionality is concerned. In this paper we focus on the role that the transmission of information between the IMF and the borrowing government has for the design of the most efficient "incentive contract." Specifically, we find that when agency problems are especially severe, and/or IMF information is very valuable, a centralized control is indeed optimal (conventional conditionality). To the contrary, when local knowledge is more important than the agency bias we expect delegation (ownership) to be the optimal incentive scheme. Controlling for economic and political factors, we find that the number of IMF conditions declines in countries with a greater social complexity and increases with the bias of the countries’ authorities and in more open and transparent countries, which is consistent with the theoretical results.IMF conditionality, delegation, communication, panel data

Agency and communication in IMF conditional lending: theory and empirical evidence

We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory.IMF conditionality, delegation, communication, panel data

Agency and Communication in IMF Conditional Lending: Theory and Empirical Evidence

We focus on the role that the transmission of information between a multilateral (the IMF) and a country has for the optimal design of conditional reforms. Our model predicts that when agency problems are especially severe, and/or IMF information is valuable, a centralized control is indeed optimal. To the contrary, when local knowledge is more important than the agency bias we expect delegation to dominate. Controlling for economic and political factors, our empirical tests show that the number of IMF conditions is lower in countries with a greater social complexity, while it increases with the bias of the countries’ authorities, openness, and transparency, consistently with the theory.IMF conditionality, delegation, communication, panel data

Political support to public debt repudiation in a Monetary Union - the role of the geographical allocation of debt.

The main arguments for the Stability and Growth Pact turn on the need to protect the European Central Bank against inflationary pressures from the fiscally prodigal countries (repudiation through inflation). Taking a political economy approach, in this paper we inquire into the conditions under which national governments may reach the decision for a partial or total repudiation of their debt. The main result produced by our model is that a debt management policy of lowering effective yields might be the dominant option for a self-interested government whose creditors consist in part of non-residents. On the basis of such result we argue that the impact of the fiscal position of the various member countries on the stability of EMU does not depend on the stock of debt but on the proportion of it that is held abroad.Monetary union; Public debt; Government default; Political economy; Political support; Special interests; Common agency.