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Stigma or cushion? IMF programs and sovereign creditworthiness


Gehring, Kai; Lang, Valentin F (2018). Stigma or cushion? IMF programs and sovereign creditworthiness. CIS Working Paper 98, University of Zurich.

Abstract

IMF programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country's access to financial markets, we use credit ratings and investor assessments for 100 countries from 1988 to 2013. Our instrumental variable strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can “cushion” against falling creditworthiness, despite contractionary adjustments related to its programs. This positive signaling effect is also visible in monthly event-based specifications using country-times-year fixed effects. A text analysis of rating statements indicates a positive signal to investors if countries under IMF programs commit to economic reforms.

Abstract

IMF programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country's access to financial markets, we use credit ratings and investor assessments for 100 countries from 1988 to 2013. Our instrumental variable strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can “cushion” against falling creditworthiness, despite contractionary adjustments related to its programs. This positive signaling effect is also visible in monthly event-based specifications using country-times-year fixed effects. A text analysis of rating statements indicates a positive signal to investors if countries under IMF programs commit to economic reforms.

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Additional indexing

Item Type:Working Paper
Communities & Collections:06 Faculty of Arts > Institute of Political Science
Dewey Decimal Classification:320 Political science
Uncontrolled Keywords:International Monetary Fund, sovereign credit ratings, capital market access, creditworthiness, financial crises
Language:English
Date:April 2018
Deposited On:16 Jan 2019 12:54
Last Modified:15 Apr 2021 14:56
Series Name:CIS Working Paper
Number of Pages:65
ISSN:1662-7504
Additional Information:auch erschienen als: CESifo Working Paper No. 7339 (November 2018) JEL Classification: E44, F33, F34, G24
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://www.ethz.ch/content/dam/ethz/special-interest/gess/cis/cis-dam/CIS_DAM_2018/WP_98_Gehring_Lang.pdf
Related URLs:http://www.cis.ethz.ch/research/working-papers.html (Organisation)

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