lending credibility
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Lending Credibility. The International Monetary Fund and the Post- Communist Transition Randall W. Stone University of Rochester . The IMF. The most universally despised of international institutions. Left: Executive committee of int’l capitalism. Right: Big government writ large. - PowerPoint PPT PresentationTRANSCRIPT
Lending CredibilityLending Credibility
The International Monetary Fund and the Post- Communist Transition
Randall W. StoneUniversity of Rochester
The IMFThe IMF
The most universally despised of international institutions
Left: Executive committee of int’l capitalism
Right: Big government writ largeModerates: Criticize tactical mistakes
The PuzzleThe Puzzle
Area specialists, qualitative researchers and practitioners attribute far-reaching influence to the IMF
• Quantitative scholars have yet to demonstrate this influence• How much influence can an international institution have?
Faulty assumptionsFaulty assumptionsThe IMF only exercises influence during
program periodsIMF intervention has a constant effect
across countries & over time IMF intervention is exogenousPolitical constraints are omitted variables
Theory: Desirable FeaturesTheory: Desirable Features
The IMF is a strategic actor with a credibility problem
Countries vary in “size”IMF influence depends on international
investorsDefection and punishment should happen in
equilibriumInflation is subject to inertia
The ModelThe Model Actors: Many investors, n governments, IMF Actions: Investors may invest, governments may
create inflation, the IMF may disburse a loan tranche Preferences: Investors, IMF are averse to inflation.
IMF prefers to disburse. Countries are tempted to defect, and the temptation is a random variable
Information: The government’s current level of temptation is private information
Repetition: Infinite
The Stage GameThe Stage Game
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The Stage GameThe Stage Game
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The Stage GameThe Stage Game
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The Stage GameThe Stage Game
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Single-shot NashSingle-shot Nash
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Single-shot NashSingle-shot Nash
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Single-shot NashSingle-shot Nash
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Repeat, repeat…Repeat, repeat…
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Repeated game equilibriumRepeated game equilibrium
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Repeated game equilibriumRepeated game equilibrium
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Repeated game equilibriumRepeated game equilibrium
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Equilibrium (PBE)Equilibrium (PBE)
IMF plays “hold the line” with small countries and “tit for tat” with large ones
Governments defect if the temptation exceeds a critical value, which depends on size and whether the program is suspended
Investors invest if there was no inflation in the previous period; interest rates depend on the size of countries
Comparative StaticsComparative StaticsLarge countries are subject to shorter
punishment periodsLarge countries defect at a higher rate,
so they are punished more frequently and pay higher interest rates
Countries defect more often when programs are already suspended
This effect is smaller in large countries
Research DesignResearch DesignEstimate duration model for IMF status
H1: Influence shorter punishmentH2: Influence more frequent
punishmentEstimate models of policy variables
H3: Influence inflation, devaluationH4: Credibility low inflation, stability
Case studies: Russia, Ukraine, Poland, Bulgaria
Duration of PunishmentDuration of Punishment
Models: 1 2 3 4IMF Quota + + - -U.S. Aid
appropriations
-** -** -** -
U.S. Aid disburseme
nts- - - -
Aid from other
countries- - + +
Duration of Punishment Intervals
0.04 0.08
1.23
0.32
0.61
1.99
0.22
1.71
1.97
0.29 0.27
2.24
2.66
0.03
0.72
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mon
ths
Duration of Good Standing Duration of Good Standing
Models 1 2 3 4IMF Quota
+ + - -
U.S. Aid (appropriation
s)-
***-
*** -* -**
U.S. Aid (disbursemen
ts) -** -** -** -
Aid from other
countries+ + + -
Duration of Program In Good Status
1.10
0.19
3.90
1.36
2.85
1.71
2.47
1.41
4.75
0.42
4.32
0.11
1.83
1.10
3.79
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Mon
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Models of Policy VariablesModels of Policy VariablesInflation Credit Exchange
Rate
U.S. aid(appropriations)
.3312**(.1674)
.2216*** (.0802)
1.0664(1.0150)
U.S. aid× IMF Status
-.6398(.5795)
-.1727* (.1086)
-.0870(3.4500)
Participant -3.0528***(.7282)
-2.6276*** (.5111)
-7.4284*(4.7868)
IMF Status 4.2098* (2.6886)
2.7895*** (.5536)
8.4440(14.4007)
Substantive effectsSubstantive effects
Inflation Credit Exchange rate
RussiaAvg
2.4% 1.6% 8%
Max 7.7% 5.2% 25%
UkraineAvg
2.9% 2% 9.7%
Max 5.7% 3.8% 18.5%
Models of Policy VariablesModels of Policy Variables
Inflation Credit Exchange Rate
Pr(Punish. Ends)
3.9140** (1.8914)
5.0416*** (1.2515)
18.4552** (8.1547)
Participant -1.1959**(.6386)
-.1121 (.4539)
1.9211(3.0627)
IMF Status 1.7499**(.7600)
1.8693*** (.5009)
2.1092 (1.9699)
1996 Russian Election1996 Russian Election
Inflation Credit Exchange Rate
Predicted(Avg/
month)0.8% 1% 3.7%
Predicted(cumulative)
10% 13% 55%
Actual(cumulative)
22% 48% 16%
Cases: Stylized FactsCases: Stylized FactsRussia & Ukraine Poland & Bulgaria
•Punished briefly •Punished severely•Frequent suspensions •Rare suspensions•Conditions negotiable •Conditions credible•Crises of 1998 •Crisis of 1997
ConclusionsConclusionsThe IMF has far-reaching influenceIMF influence is limited if it cannot credibly commit to enforcing conditionality
Reform?
Increase the IMF’s independence