Signaling Credibility? The IMF and Catalytic Finance

IMF programs are thought to function as a seal of approval to international markets, though evidence suggests Fund programs do not attract capital inflows. Existing studies fail to address the effects of selection into IMF programs, which raises questions about the robustness of the findings. Correcting for selection bias, I find that states under Fund programs experience significant outflows of portfolio investment, which is a quot;most likely casequot; for catalytic effects. The source of this capital flight is the medicine (the Fund program), not the disease (the economic downturn necessitating the IMF program). I argue that austerity deters portfolio inflows through its effects on future returns. These findings confirm previous studies and have broader implications for both the influence of IMF programs and the politics of economic reform