The Causes and Consequences of IMF Conditionality

37 Pages Posted: 3 Oct 2003

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Roland Vaubel

University of Mannheim - School of Economics (VWL)

Abstract

We develop a public choice model of the International Monetary Fund in which credit and conditionality are simultaneously determined by the demand for, and supply of, IMF credit. A graphical analysis illustrates the comparative statics in response to various shocks. We apply the model to explain the main changes in the rules governing conditionality and in the number of conditions per program. We observe a highly significant positive correlation between the number of conditions per program and the prior use of Fund credit relative to quota in 1959-99. A panel data analysis of 206 letters of intent in 4/1997-2/2003 reveals that the number of conditions depends negatively on international reserves and positively on interest rates in the world capital market, monetary expansion in the borrowing country and the number of World Bank adjustment loans. Finally, the effects of conditionality are analyzed for the first time. Our instrumental-variables estimate shows that the number of conditions does not have a significant effect on any of the five typical instrument and target variables considered. The final section links the analysis of IMF conditionality with the literature on tied transfers in public economics and develops some novel proposals for the reform of IMF conditionality.

Keywords: IMF, Conditionality, Effects of IMF conditions

JEL Classification: D72, F33, F34, O57

Suggested Citation

Dreher, Axel and Vaubel, Roland, The Causes and Consequences of IMF Conditionality. Available at SSRN: https://ssrn.com/abstract=449180 or http://dx.doi.org/10.2139/ssrn.449180

Axel Dreher

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Roland Vaubel (Contact Author)

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

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