Lending CredibilityLending Credibility

The International Monetary Fund and the Post- Communist Transition

Randall W. StoneUniversity of Rochester

The IMFThe IMF

The most universally despised of international institutions

Left: Executive committee of int’l capitalism

Right: Big government writ largeModerates: Criticize tactical mistakes

The PuzzleThe Puzzle

Area specialists, qualitative researchers and practitioners attribute far-reaching influence to the IMF

• Quantitative scholars have yet to demonstrate this influence• How much influence can an international institution have?

Faulty assumptionsFaulty assumptionsThe IMF only exercises influence during

program periodsIMF intervention has a constant effect

across countries & over time IMF intervention is exogenousPolitical constraints are omitted variables

Theory: Desirable FeaturesTheory: Desirable Features

The IMF is a strategic actor with a credibility problem

Countries vary in “size”IMF influence depends on international

investorsDefection and punishment should happen in

equilibriumInflation is subject to inertia

The ModelThe Model Actors: Many investors, n governments, IMF Actions: Investors may invest, governments may

create inflation, the IMF may disburse a loan tranche Preferences: Investors, IMF are averse to inflation.

IMF prefers to disburse. Countries are tempted to defect, and the temptation is a random variable

Information: The government’s current level of temptation is private information

Repetition: Infinite

The Stage GameThe Stage Game

•

•

•

N I

b

1-b

The Stage GameThe Stage Game

•

•

•

N I

k

k

0

0

b

1-b

The Stage GameThe Stage Game

•

•

••

•

•

•

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

b

1-b

The Stage GameThe Stage Game

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Single-shot NashSingle-shot Nash

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Single-shot NashSingle-shot Nash

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Single-shot NashSingle-shot Nash

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Repeat, repeat…Repeat, repeat…

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Repeated game equilibriumRepeated game equilibrium

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Repeated game equilibriumRepeated game equilibrium

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Repeated game equilibriumRepeated game equilibrium

•

•

••

•

•

•

•

•

••

••

••

••

••

••••••

••

••••

N I

k

k

0

0

gi

gi

gi

gi

x

x

x

x

0

0

0

0

IMF

IMF

IMF

IMF

IMF

IMF

IMF

IMF

s

s

s

s

s

s

s

s

0

0

0

0

0

0

0

0

b

1-b

Equilibrium (PBE)Equilibrium (PBE)

IMF plays “hold the line” with small countries and “tit for tat” with large ones

Governments defect if the temptation exceeds a critical value, which depends on size and whether the program is suspended

Investors invest if there was no inflation in the previous period; interest rates depend on the size of countries

Comparative StaticsComparative StaticsLarge countries are subject to shorter

punishment periodsLarge countries defect at a higher rate,

so they are punished more frequently and pay higher interest rates

Countries defect more often when programs are already suspended

This effect is smaller in large countries

Research DesignResearch DesignEstimate duration model for IMF status

H1: Influence shorter punishmentH2: Influence more frequent

punishmentEstimate models of policy variables

H3: Influence inflation, devaluationH4: Credibility low inflation, stability

Case studies: Russia, Ukraine, Poland, Bulgaria

Duration of PunishmentDuration of Punishment

Models: 1 2 3 4IMF Quota + + - -U.S. Aid

appropriations

-** -** -** -

U.S. Aid disburseme

nts- - - -

Aid from other

countries- - + +

Duration of Punishment Intervals

0.04 0.08

1.23

0.32

0.61

1.99

0.22

1.71

1.97

0.29 0.27

2.24

2.66

0.03

0.72

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mon

ths

Duration of Good Standing Duration of Good Standing

Models 1 2 3 4IMF Quota

+ + - -

U.S. Aid (appropriation

s)-

***-

*** -* -**

U.S. Aid (disbursemen

ts) -** -** -** -

Aid from other

countries+ + + -

Duration of Program In Good Status

1.10

0.19

3.90

1.36

2.85

1.71

2.47

1.41

4.75

0.42

4.32

0.11

1.83

1.10

3.79

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Mon

ths

Models of Policy VariablesModels of Policy VariablesInflation Credit Exchange

Rate

U.S. aid(appropriations)

.3312**(.1674)

.2216*** (.0802)

1.0664(1.0150)

U.S. aid× IMF Status

-.6398(.5795)

-.1727* (.1086)

-.0870(3.4500)

Participant -3.0528***(.7282)

-2.6276*** (.5111)

-7.4284*(4.7868)

IMF Status 4.2098* (2.6886)

2.7895*** (.5536)

8.4440(14.4007)

Substantive effectsSubstantive effects

Inflation Credit Exchange rate

RussiaAvg

2.4% 1.6% 8%

Max 7.7% 5.2% 25%

UkraineAvg

2.9% 2% 9.7%

Max 5.7% 3.8% 18.5%

Models of Policy VariablesModels of Policy Variables

Inflation Credit Exchange Rate

Pr(Punish. Ends)

3.9140** (1.8914)

5.0416*** (1.2515)

18.4552** (8.1547)

Participant -1.1959**(.6386)

-.1121 (.4539)

1.9211(3.0627)

IMF Status 1.7499**(.7600)

1.8693*** (.5009)

2.1092 (1.9699)

1996 Russian Election1996 Russian Election

Inflation Credit Exchange Rate

Predicted(Avg/

month)0.8% 1% 3.7%

Predicted(cumulative)

10% 13% 55%

Actual(cumulative)

22% 48% 16%

Cases: Stylized FactsCases: Stylized FactsRussia & Ukraine Poland & Bulgaria

•Punished briefly •Punished severely•Frequent suspensions •Rare suspensions•Conditions negotiable •Conditions credible•Crises of 1998 •Crisis of 1997

ConclusionsConclusionsThe IMF has far-reaching influenceIMF influence is limited if it cannot credibly commit to enforcing conditionality

Reform?

Increase the IMF’s independence