Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

67 Pages Posted: 10 May 2018  

Kai Gehring

University of Zurich - Chair of Political Economy; University of Heidelberg

Valentin Lang

University of Zurich

Date Written: April 26, 2018

Abstract

International Monetary Fund (IMF) loan programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that a negative association between IMF programs and perceptions of sovereign creditworthiness only appears when endogenous selection into programs is not adequately accounted for. We use credit ratings from multiple agencies and professional investors for 100 countries in the 1987-2013 period as measures of creditworthiness. For identification, we exploit the differential effect of changes in the IMF’s liquidity on loan allocation as a source of exogenous variation. Our results suggest that a positive signaling effect prevents creditworthiness from falling despite economic contractions under IMF programs. Event-based specifications using monthly data and country-times-year fixed effects as well as a systematic text analysis of rating statements support this interpretation.

Keywords: International Monetary Fund, sovereign credit ratings, capital market access, creditworthiness, financial crises

JEL Classification: E44, F33, F34, G24

Suggested Citation

Gehring, Kai and Lang, Valentin, Stigma or Cushion? IMF Programs and Sovereign Creditworthiness (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=3169341 or http://dx.doi.org/10.2139/ssrn.3169341

Kai Gehring (Contact Author)

University of Zurich - Chair of Political Economy ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland
+4917620916056 (Phone)

HOME PAGE: http://www.kai-gehring.net

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Valentin Lang

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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