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Lending Credibility

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.

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Lending Credibility

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  1. Lending Credibility The International Monetary Fund and the Post- Communist Transition Randall W. Stone University of Rochester

  2. The IMF The most universally despised of international institutions Left: Executive committee of int’l capitalism Right: Big government writ large Moderates: Criticize tactical mistakes

  3. Area specialists, qualitative researchers and practitioners attribute far-reaching influence to the IMF The Puzzle • Quantitative scholars have yet to • demonstrate this influence • How much influence can an international • institution have?

  4. Faulty assumptions • The IMF only exercises influence during program periods • IMF intervention has a constant effect across countries & over time • IMF intervention is exogenous • Political constraints are omitted variables

  5. Theory: Desirable Features • The IMF is a strategic actor with a credibility problem • Countries vary in “size” • IMF influence depends on international investors • Defection and punishment should happen in equilibrium • Inflation is subject to inertia

  6. The 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

  7. The Stage Game • b • N I 1-b •

  8. The Stage Game k • 0 b • N I k 1-b • 0

  9. The Stage Game gi x • k 0 • gi x • 0 b 0 • N I gi x k • 1-b • 0 gi x • 0 0

  10. The Stage Game IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  11. Single-shot Nash IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  12. Single-shot Nash IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  13. Single-shot Nash IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  14. Repeat, repeat… IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  15. Repeated game equilibrium IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  16. Repeated game equilibrium IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  17. Repeated game equilibrium IMF • s gi • x • • 0 k IMF • s • 0 • • 0 IMF • gi s x • • • 0 0 b IMF • s • • 0 • 0 • N I IMF s • gi x • k • 0 • IMF 1-b s • • 0 • 0 gi IMF • x s • • • 0 0 IMF • s • 0 • 0

  18. 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

  19. Comparative Statics • Large countries are subject to shorter punishment periods • Large 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

  20. Research Design • Estimate duration model for IMF status H1: Influence  shorter punishment H2: Influence  more frequent punishment • Estimate models of policy variables H3: Influence  inflation, devaluation H4: Credibility  low inflation, stability • Case studies: Russia, Ukraine, Poland, Bulgaria

  21. Duration of Punishment

  22. Duration of Good Standing

  23. Models of Policy Variables

  24. Substantive effects

  25. Models of Policy Variables

  26. 1996 Russian Election

  27. Cases: Stylized Facts Russia & Ukraine Poland & Bulgaria • Punished briefly •Punished severely • Frequent suspensions •Rare suspensions • Conditions negotiable •Conditions credible • Crises of 1998 •Crisis of 1997

  28. Conclusions • The IMF has far-reaching influence • IMF influence is limited if it cannot credibly commit to enforcing conditionality Reform? Increase the IMF’s independence

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