Doing More with Less: The Catalytic Function of IMF Lending and the Role of Program Size

44 Pages Posted: 21 Apr 2020

Date Written: 2020


Financial assistance provided by the International Monetary Fund (IMF) is supposed to unlock other financing, acting as a catalyst for private capital flows. The empirical evidence of the presence of such a catalytic effect has, however, been mixed. This paper shows that a possible explanation for the rather inconclusive empirical evidence to date is the neglect of the size of an IMF program. Applying a novel identification strategy to account for endogenous selection into (large) adjustment programs, and using a comprehensive data set spanning the years 1990-2018, we show that the catalytic effect of IMF financial assistance is weakened - and potentially reversed - if the size of a program exceeds a certain level. We argue that large IMF financial assistance coupled with the IMF's preferred creditor status can lead to a crowding-out of private investors by increasing their loss in the event of default. Our findings add to the debate on the optimal size of Fund-supported programs and can also inform the broader policy discussions on the adequacy of IMF resources.

Keywords: International Monetary Fund, catalysis, capital flows, financial crises

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

Suggested Citation

Krahnke, Tobias, Doing More with Less: The Catalytic Function of IMF Lending and the Role of Program Size (2020). Deutsche Bundesbank Discussion Paper No. 18/2020, Available at SSRN:

Tobias Krahnke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

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