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Can IMF program design resurrect investor sentiment? An empirical investigation

Published online by Cambridge University Press:  20 September 2019

Krishna Chaitanya Vadlamannati Open the ORCID record for Krishna Chaitanya Vadlamannati [Opens in a new window]
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Abstract

Does international investor sentiment improve when a crises-ridden country participates in an International Monetary Fund (IMF) program? I argue that merely participating in an IMF program may not revive the sentiments of investors. Rather, investor sentiment would improve when governments enhance the credibility of their commitment to reforms by accepting severe conditions imposed by the IMF, which incur ex ante and ex post political costs. Using panel data on 166 countries during the 1992–2013 period (twenty-two years), I find that countries participating in IMF programs, with conditions attached, specifically prior actions and performance criteria conditions, after controlling for endogeneity concerns using exogeneous instruments, are associated with an increase in long-term investor sentiment. These results are robust to using alternative data, variables and estimation methods. My findings are in stark contrast to those who argue that IMF conditional programs are akin to swallowing a bitter pill. In fact, my results demonstrate that the so-called bitter pill may act as a palliative.

Keywords

IMFconditionalitiesinternational investorsendogeneityinstruments
Type
Research Article
Information
Business and Politics , Volume 22 , Issue 2 , June 2020 , pp. 339 - 382
Copyright
Copyright © V.K. Aggarwal 2019 and published under exclusive license to Cambridge University Press

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Footnotes

†

I thank Indra de Soysa, Christopher Kilby, Christian Bjørnskov, Nate Jensen, Niklas Potrafke, Ragnar Torvik, James Vreeland, Arusha Cooray and participants at Economics department staff seminar, NTNU for some useful comments. My special thanks to the anonymous referees and the editor Tim Marple for very constructive comments and suggestions.

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