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IMF conditionalities, liquidity provision, and incentives for fiscal adjustment

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  • Guimaraes, Bernardo
  • Iazdi, Oz

Abstract

This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance towards immediate liquidity provision.

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  • Guimaraes, Bernardo & Iazdi, Oz, 2013. "IMF conditionalities, liquidity provision, and incentives for fiscal adjustment," MPRA Paper 48896, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:48896
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    Cited by:

    1. Guimarães, Bernardo de Vasconcellos & Ladeira, Carlos Eduardo de Almeida, 2015. "The determinants of IMF fiscal conditionalities: economics or politics?," Textos para discussão 391, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    2. Bernardo Guimaraes & Carlos Eduardo Ladeira, 2021. "The determinants of IMF fiscal conditionality: Economics or politics?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1361-1399, November.

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    More about this item

    Keywords

    IMF; conditionality; fiscal adjustment; liquidity provision; sudden stop.;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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