On US politics and IMF lending

TY - JOUR

T1 - On US politics and IMF lending

AU - Andersen, Thomas Barnebeck

AU - Harr, Thomas

AU - Tarp, Finn

N1 - JEL Classification: F33, F34, O1

PY - 2006

Y1 - 2006

N2 - The political factors shaping IMF lending to developing countries have attracted attention in recent empirical work. This goes in particular for the role and influence of the US. However, scant formal modelling makes interpretation of empirical results difficult. In this paper, we propose a model in which the US acts as principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive an optimal loan allocation mechanism, which leads to the testable hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country's bliss point and its actual policy stance measured relative to the US. We introduce a bliss-point proxy and demonstrate that our hypothesis is strongly supported in the data. Moreover, we show that not accounting for bliss points may lead to endogeneity bias in empirical work

AB - The political factors shaping IMF lending to developing countries have attracted attention in recent empirical work. This goes in particular for the role and influence of the US. However, scant formal modelling makes interpretation of empirical results difficult. In this paper, we propose a model in which the US acts as principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive an optimal loan allocation mechanism, which leads to the testable hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country's bliss point and its actual policy stance measured relative to the US. We introduce a bliss-point proxy and demonstrate that our hypothesis is strongly supported in the data. Moreover, we show that not accounting for bliss points may lead to endogeneity bias in empirical work

KW - Faculty of Social Sciences

KW - IMF lending

U2 - 10.1016/j.euroecorev.2005.07.001

DO - 10.1016/j.euroecorev.2005.07.001

M3 - Journal article

SN - 0014-2921

VL - 50

SP - 1843

EP - 1862

JO - European Economic Review

JF - European Economic Review

IS - 7

ER -