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Stigma or cushion? IMF programs and sovereign creditworthiness


Gehring, Kai; Lang, Valentin F (2020). Stigma or cushion? IMF programs and sovereign creditworthiness. Journal of Development Economics, 146:102507.

Abstract

Policymakers in crisis countries often hesitate to enter IMF programs out of the fear that they trigger adverse reactions on financial markets. We explain why credit ratings and investor assessments are reliable measures of creditworthiness during crises, and examine how IMF programs affect them with three distinct identification strategies. The first strategy exploits the differential effect of changes in IMF liquidity on loan allocation as an instrument, the second uses the exact timing of program agreements, and the third provides text-based evidence from rating agency statements. When accounting for endogenous selection, we find that IMF programs help countries regain their creditworthiness. Even though IMF programs tend to result in economic contractions, the agreement on a program is perceived as a positive signal on financial markets. Our text-based analysis supports this signaling effect and suggests that the content of programs matters for how they are perceived.

Abstract

Policymakers in crisis countries often hesitate to enter IMF programs out of the fear that they trigger adverse reactions on financial markets. We explain why credit ratings and investor assessments are reliable measures of creditworthiness during crises, and examine how IMF programs affect them with three distinct identification strategies. The first strategy exploits the differential effect of changes in IMF liquidity on loan allocation as an instrument, the second uses the exact timing of program agreements, and the third provides text-based evidence from rating agency statements. When accounting for endogenous selection, we find that IMF programs help countries regain their creditworthiness. Even though IMF programs tend to result in economic contractions, the agreement on a program is perceived as a positive signal on financial markets. Our text-based analysis supports this signaling effect and suggests that the content of programs matters for how they are perceived.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:06 Faculty of Arts > Institute of Political Science
Dewey Decimal Classification:320 Political science
Scopus Subject Areas:Social Sciences & Humanities > Development
Social Sciences & Humanities > Economics and Econometrics
Uncontrolled Keywords:economics and econometrics, development financial crises, capital market access, IMF
Language:English
Date:September 2020
Deposited On:07 Jan 2021 08:31
Last Modified:08 Jan 2021 21:02
Publisher:Elsevier
ISSN:0304-3878
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jdeveco.2020.102507

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