The effect of IMF lending on the probability of sovereign debt crises

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We find that IMF programs significantly increase the probability of subsequent sovereign defaults by approximately 1.5 to 2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by specifications that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to fiscal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the effects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible. Terms of use: Documents inJournal of Economic Literature Classification Codes: F33, F34, C25, C35

IMF Lending and Banking Crises

“…Conversely, Jorra (2012), focusing on 57 developing and emerging economies over the period 1975-2008, shows that IMF-supported programs significantly increase the average probability of subsequent sovereign defaults by 1.4 percentage points. This is a meaningful effect, given a sample frequency of defaults of 4.8 percent.…”

“…In this context, our contribution extends the recent empirical literature on the IMF's role in mitigating financial instability. This literature has investigated the effect of IMF-supported programs on sudden stops of financial capital flows (Eichengreen et al, 2008), on currency crises (Dreher and Walter, 2010), on sovereign debt crises (Jorra, 2012), and on the spread of the 2007-08 global financial crisis (Presbitero and Zazzaro, 2012).…”

Assessing sovereign debt default by efficiency

“…Following Kohlscheen (2009), Celasun and Harms (2011) and Jorra (2012), our principal model is pooled Probit with clustered standard errors. To check for robustness of empirical outcomes we also apply two additional modeling techniques: Logit and discrete-time proportional hazard model (Hazard) to test the feasibility of using technical efficiency to assess the likelihood of default/crises.…”

“…The RE standard errors are smaller than FE. For example, Jorra (2012) informs that FE Logit is a perfect predictor of default cases and reduces sample size. Also, when predictor variables do not change over time RE is a better choice.…”

Determinants of Fiscal Distress in Italian Municipalities

“…While there is significant literature on sovereign debt crisis and default (see, among others, Schaltegger and Weder 2015;Jorra 2012;Manasse and Roubini 2009), less attention on the same topic has been paid at the local level. There are studies on how local fiscal performances are affected by specific budget choices (see, for example, Epple and Spatt 1986;Capeci 1994;Buettner and Wildasin 2006;Skidmore and Scorsone 2011) or by the degree of decentralization (Von Hagen and Eichengreen 1996;Hausmann 1998;Richard and Musgrave 1989).…”