Stigma or Cushion? IMF Programs and Sovereign Creditworthiness
CESifo Working Paper No. 7339
67 Pages Posted: 10 May 2018 Last revised: 12 Dec 2018
Date Written: August 15, 2018
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
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