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The Causes and Consequences of IMF Conditionality

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  • Axel Dreher

    (Mannheim University)

  • Roland Vaubel

    (Mannheim University)

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.

Suggested Citation

  • Axel Dreher & Roland Vaubel, 2003. "The Causes and Consequences of IMF Conditionality," International Finance 0309004, University Library of Munich, Germany, revised 29 Mar 2004.
    • Handle: RePEc:wpa:wuwpif:0309004
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    References listed on IDEAS

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    More about this item

    Keywords

    IMF Conditionality Reform;

    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
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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