Does it Take Two to Tango? Improving Cooperation between the IMF and the World Bank: Theory and Empirical Evidence

This paper analyzes the impact of different governance structures on the degree of Bank-Fund cooperation, focusing on the quality of their information transmission. It compares the performance of a decentralized governance with that of a centralized one. A centralized structure better addresses the necessity of coordinating policy actions, but greater consistency in policy actions will be achieved at the expenses of a less satisfactory adaptation to \"local conditions.\" It is shown that when the need for coordination is relevant, a centralized governance allows to achieve a greater level of overall payoffs. In the real world the governance structure of the two institutions is certainly decentralized. A testable implication of the model would then be to see whether Bank-Fund’s coordination is really important for their impact on recipient countries. The empirical evidence shows that a Bank-Fund simultaneous intervention is beneficial to growth and that such beneficial effect is increasing with the willingness to coordinate of the two organizations. This evidence would then be in favor of a (more) centralized governance.