What Influences Learning from Financial Crisis? The Role of IMF Programs and CBI

• In Event: The International Political Economy of Money and Credit

Abstract

There has been growing research on the political economy of government responses to financial crises. In earlier work (Amri et.al. 2017) we found evidence consistent with policy learning on average but also that there was considerable variability across countries. In this paper we investigate some of the possible explanations for the differences. Improvement in ex-post performances requires both that actors learn from the crises and are able to implement improved policies, what we call effective policy learning. One hypothesis is that the presence of central bank independence reduces the effects of political pressures to stall reform or revert to previously imprudent policies and hence enables more effective policy responses. A second involves IMF programs. The effects of such programs have been controversial. For example, Walter and Dreher (2010) and Papi et al. (2015) found that IMF programs reduced the risk of future crises, while Aizenman and Noy (2013) found that countries who borrowed from the IMF experience more frequent and deeper crises in the future. Not only do such results conflict but they leave open the mechanisms through which effective learning does or does not occur. We investigate an important aspect of this latter question by looking at the behavior of credit growth. We consider substantial reductions in credit growth to be an indicator of effective policy learning, given that the vast majority of financial crises were preceded by excessively rapid growth of private credit. Using a difference-in-difference analysis, and controlling for a number of other variables, we find that crisis-hit countries with IMF programs experience a larger reduction in post-crisis credit growth (i.e., more effective learning), but only when there is an independent central bank to implement the necessary reforms. Therefore, IMF programs and the degree of central bank independence seem to be complementary to each other in affecting effective learning from past crises. We discuss reasons why this seems a plausible result.

Authors

• Puspa D Amri, Sonoma State University

• Thomas D. Willett, Claremont Graduate University

• Greg Richey, California State University San Bernardio