IMF-supported adjustment programs: Welfare implications and the catalytic effect

Arbeitspapier

The author studies the welfare implications of adjustment programs supported by the International Monetary Fund (IMF). He uses a model where an endogenous borrowing constraint, set up by international lenders who will never lend more than a debt ceiling, forces the borrowing economy to always choose repayment over default. The immediate potential welfare cost of joining a program is driven by IMF conditionality: to be able to borrow from the IMF, the country has to submit to limits on the consumption of public goods. The benefits derive from the additional borrowing from the IMF (at a lower interest rate) and/or through a "catalytic effect" on private loans, which facilitates consumption smoothing over time. Simulations of the dynamic model in two institutional environments - with and without the IMF - are compared. Results indicate that when conditionality forces the country to save more, at a cost that does not prevent it from joining an IMF program, the resulting lower probability of default can induce private lenders to relax their borrowing constraints. Based on a calibration of the model for the Brazilian economy, the overall welfare gains associated with IMF programs are relatively small.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2007-22

Classification and Topics

• Classification: Wirtschaft ; Current Account Adjustment; Short-term Capital Movements ; International Monetary Arrangements and Institutions ; International Lending and Debt Problems ; Open Economy Macroeconomics
• Subject: Internationale Wirtschaftshilfe ; Internationaler Kredit ; Verschuldungsrestriktion ; Wohlfahrtseffekt ; Wirtschaftsmodell ; Brasilien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): De Resende, Carlos
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2007

Further information

• DOI: doi:10.34989/swp-2007-22
• Handle: http://hdl.handle.net/10419/53950
• Last update: 10.03.2025, 11:41 AM CET