Domestic Public Opinion and the Catalytic Effects of IMF Programs

• In Event: Domestic Politics and the International Monetary Fund

Abstract

Although International Monetary Fund (IMF) programs are designed to restore international investors’ confidence, only some borrowers experience a successful return to the markets. In this paper, I aim to explain the within-country as well as cross-country variations of market reactions to IMF programs. I argue that the investors’ reactions depend on the domestic political conditions that affect implementation of IMF conditionality. Market participants are more likely to invest, on more favorable terms, in countries where governments can rehabilitate the economy by delivering necessary reforms. Borrowing governments with high public support are more likely to successfully implement the reforms than those without public support. Market participants, therefore, react more favorably to more popular governments. Using data on 17 countries for the period 1997-2016, I find robust evidence supporting these claims, even after addressing endogeneity issues, selection bias inherent in IMF programs, and the non-stationarity of the data.

Author

• Sujeong Shim, University of Wisconsin, Madison