Stigma or Cushion? IMF Programs and Sovereign Creditworthiness

63 Pages Posted: 10 May 2018 Last revised: 4 Oct 2018

See all articles by Kai Gehring

Kai Gehring

University of Zurich - Chair of Political Economy; Heidelberg University

Valentin Lang

University of Zurich

Date Written: August 15, 2018

Abstract

IMF programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country's access to financial markets, we use credit ratings and investor assessments for 100 countries from 1988 to 2013. Our instrumental variable strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can “cushion” against falling creditworthiness, despite contractionary adjustments related to its programs. This positive signaling effect is also visible in monthly event-based specifications using country-times-year fixed effects. A text analysis of rating statements indicates a positive signal to investors if countries under IMF programs commit to economic reforms.

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 (August 15, 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

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Valentin Lang

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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