Catalytic IMF? A Gross Flows Approach

Abstract

The financial assistance the International Monetary Fund provides is expected to catalyze private capital flows. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the Fund’s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we document dynamics that are absent from existing models on the catalytic effect of IMF loans. Our results show significant differences in how resident and foreign investors react to IMF programs. While IMF lending does not catalyze foreign capital, it does affect the behaviour of resident investors, who are both less likely to place their savings abroad and more likely to repatriate their foreign assets. As domestic banks’ flows drive this effect, we conclude that IMF catalysis is “a banking story”. In comparing the effects across crises, we find that the effect of the IMF on resident investors is strongest during sovereign defaults, and that it exerts the least effect on foreign investors during banking crises. Across program types, only loans with longer maturities seem to generate catalytic effects.

Keywords: IMF, Catalysis, residence, capital flows

JEL Classification: F32, F33, F36, G01, G15