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Does the IMF cause moral hazard and political business cycles? Evidence from panel data

Author

Listed:
  • Axel Dreher

    (University of Mannheim)

  • Roland Vaubel

    (University of Mannheim)

Abstract
Using panel data for 106 countries in 1971-1997, we estimate generalized least squares regressions to explain IMF lending as well as monetary and fiscal policies in the recipient countries. With respect to moral hazard, we find that a country's rate of monetary expansion and its government budget deficit is higher the less it has exhausted its borrowing potential in the Fund and the more credit it has received from the Fund. Moreover, the budget deficit is shown to be larger the higher the interest subsidy offered by the IMF. As for political business cycles, our evidence indicates that, even with a considerable number of control variables, IMF credits in the more democratic recipient countries are larger in pre-election and post-election years. Thus, IMF lending seems to facilitate the generation of political business cycles, while IMF conditionality may serve as a scapegoat for unpopular corrective measures after the election. The paper concludes with implications for IMF reform.

Suggested Citation

  • Axel Dreher & Roland Vaubel, 2002. "Does the IMF cause moral hazard and political business cycles? Evidence from panel data," International Finance 0207002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0207002
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Marchesi, Silvia & Sabani, Laura, 2007. "IMF concern for reputation and conditional lending failure: Theory and empirics," Journal of Development Economics, Elsevier, vol. 84(2), pages 640-666, November.
    2. Boockmann, Bernhard & Dreher, Axel, 2003. "The contribution of the IMF and the World Bank to economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 633-649, September.
    3. Dreher, Axel, 2002. "The Development and Implementation of IMF and World Bank Conditionality," Discussion Paper Series 26352, Hamburg Institute of International Economics.
    4. Jan‐Egbert Sturm & Helge Berger & Jakob De Haan, 2005. "Which Variables Explain Decisions On Imf Credit? An Extreme Bounds Analysis," Economics and Politics, Wiley Blackwell, vol. 17(2), pages 177-213, July.
    5. Andrew Abbott & Philip Jones, 2021. "The cyclicality of government foreign-aid expenditure: voter awareness in “good” times and in “bad”," Public Choice, Springer, vol. 186(1), pages 97-117, January.
    6. Harrigan, Jane & Wang, Chengang & El-Said, Hamed, 2006. "The economic and political determinants of IMF and world bank lending in the Middle East and North Africa," World Development, Elsevier, vol. 34(2), pages 247-270, February.
    7. Zeaiter, Hussein Zeaiter, 2013. "Sovereign Debt Defaults: Evidence using Extreme bounds Analysis," Working Papers 32/2013, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
    8. Jean-Pierre Allegret & Philippe Dulbecco, 2007. "The institutional failures of International Monetary Fund conditionality," The Review of International Organizations, Springer, vol. 2(4), pages 309-327, December.
    9. Fratzscher, Marcel & Reynaud, Julien, 2011. "IMF surveillance and financial markets--A political economy analysis," European Journal of Political Economy, Elsevier, vol. 27(3), pages 405-422, September.
    10. Graham Bird & Dane Rowlands, 2003. "Political Economy Influences Within the Life‐Cycle of IMF Programmes," The World Economy, Wiley Blackwell, vol. 26(9), pages 1255-1278, September.
    11. Michael Hutchison, 2003. "A Cure Worse Than the Disease? Currency Crises and the Output Costs of IMF-Supported Stabilization Programs," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 321-359, National Bureau of Economic Research, Inc.
    12. Ilan Noy, 2004. "Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach," Working Papers 200402, University of Hawaii at Manoa, Department of Economics.
    13. Francisco José Veiga, 2002. "IMF arrangements, politics and the timing of stabilizations," NIPE Working Papers 2/2002, NIPE - Universidade do Minho.

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    More about this item

    Keywords

    IMF programs; political business cycles; moral hazard;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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