International Monetary Fund. Programs and Capital Market Access

This thesis studies how International Monetary Fund (IMF) loans interactwith private capital flows and how they affect the level of welfare of borrowercountries and private lenders.The first chapter presents a model highlighting the fact that the IMF hasboth de jure and de facto seniority rights over private creditors. It is shown thatIMF lending affects borrowers and lenders in different ways. Ex-post, once theinitial borrowing decisions have been made, an IMF intervention always makethe borrower country better off. The effects on private lenders depend on thesize of the senior intervention and on what they expect to get in case that theIMF does not intervene. For some parameter values, IMF interventions makeexisting lenders worse off when the liquidity situation is either good or weak andmake them better off when it is in an intermediate range. This is consistent withthe empirical evidence presented in Chapter 2. The expectation of a future IMFintervention may reduce the level of borrowing and borrowers' welfare ex-ante,because seniority allows the IMF to lend in cases where it is not socially optimalto do so. This effect is contrary to the moral hazard view where "too much"rescuing leads to "too much" borrowing. Thus, the country may have incentivesto commit today not to borrow tomorrow from the IMF in the future, althoughthis promise is not time consistent.The second chapter, which is a joint work with Ashoka Mody, analyzes empir-ically if IMF programs influence the ability of developing country issuers to tapinternational bond markets and whether they improve spreads paid on the bondsissued. It is found that Fund programs do not provide a uniformly favorablesignaling effect. Instead, the evidence is most consistent with a positive e®ect ofIMF programs when they are viewed as likely to lead to policy reform and whenundertaken before economic fundamentals have deteriorated significantly. Thesize of the Fund's program matters, but the credibility of a joint commitment bythe country and the IMF appears to be critical.