Stigma or Cushion? IMF Programs and Sovereign Creditworthiness
67 Pages Posted: 10 May 2018
Date Written: April 26, 2018
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
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