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 Moderates: Criticize tactical mistakes The 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 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 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 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 The Stage Game • b N • 1-b I • The Stage Game k • 0 b N • 1-b I k • 0 The Stage Game gi • k 0 • N • 1-b gi x • 0 b x 0 I k • gi x • 0 x gi 0 • 0 The Stage Game gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Single-shot Nash gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Single-shot Nash gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Single-shot Nash gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Repeat, repeat… gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Repeated game equilibrium gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Repeated game equilibrium gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • Repeated game equilibrium gi • k N • 1-b gi x • 0 0 I k • gi x • 0 x gi 0 • s IMF 0 s 0 • b x IMF • 0 • IMF • IMF • IMF • IMF • IMF • IMF • 0 s 0 s 0 s 0 s 0 s 0 s 0 • • • • • • • • • • • • • • • • 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 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 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 Duration of Punishment Models: 1 2 3 4 IMF Quota + + - - -** -** -** - - - - - U.S. Aid appropriation s U.S. Aid disbursement s Aid from other D C ) ) (t1) (t1) (t6 (t1 le 0.08 ve s it n re d tio er C es tic R es h om In fla n ca tS tio gh 0.29 In fla ef t-r i l) cy n 0.22 h *L ra tio ec le 0.32 C l) El Au to c to ca tS rt n Pr (G ov 't f al th s gh po ta tio 1.99 r(G ov 't f al en ) ts ) ns Ai d en ta ry Su p gm D tio m ia pr se ur ro O EC ftri en Le am sb pp Fr a (d i (a S ta 2.0 M on rli Ai d Ai d -U Q uo 0.5 Pa S S on 0.04 U U N IM F Duration of Punishment Intervals 3.0 2.66 2.5 2.24 1.97 1.71 1.5 1.23 1.0 0.61 0.72 0.27 0.03 0.0 Duration of Good Standing Models IMF Quota 1 2 3 4 + + - - -* -** -** - + - U.S. Aid -*** -*** (appropriations) U.S. Aid -** -** (disbursements) Aid from other + + countries IM F No Qu n-U ota S US OE Ai CD d( Ai ap d pr US op ria Ai d( tio di s ns ) bu rse me nts Fr ) ag Pa me rlia nta me tio n nta ry Su pp or Le t ft-r i gh tS Mo ca nth le st oE lec tio n Au toc Pr ra (G cy ov Pr 't f (G all ov )* 't f Le all ) ft-r i gh tS ca le Inf lat i on (t1) Inf Ch lat Do i on me (tsti 6) cC re di t Ch (t1) Re se rve s( t-1 ) Months Duration of Program In Good Status 5.0 1.5 0.5 4.75 4.5 4.32 4.0 3.90 0.19 3.79 3.5 3.0 2.85 2.5 2.47 2.0 1.71 1.36 1.83 1.41 1.10 1.10 1.0 0.42 0.11 0.0 Models of Policy Variables Inflation Credit Exchange Rate .3312** (.1674) .2216*** (.0802) 1.0664 (1.0150) -.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) U.S. aid (appropriations) U.S. aid × IMF Status Substantive effects Inflation Credit Exchang e rate Russia Avg 2.4% 1.6% 8% Max 7.7% 5.2% 25% Ukraine Avg 2.9% 2% 9.7% Max 5.7% 3.8% 18.5% Models 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 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 Facts Russia & Ukraine Poland & Bulgaria •Punished briefly •Frequent suspensions •Conditions negotiable •Crises of 1998 •Punished severely •Rare suspensions •Conditions credible •Crisis of 1997 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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