Monday, November 30th, 2PM EDT
Sujeong Shim (Wisconsin), “Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending”
Abstract: In this paper, I explain variations in private international investors’ reactions to International Monetary Fund (IMF) programs (“the catalytic effect”). Focusing on a borrower’s domestic politics, I argue that a borrower government’s popularity is an important cue for investors about its ability to implement essential IMF conditionality. Therefore, investors react more favorably to more popular IMF borrowers. However, the effect of government popularity on investor behavior decays over time: it provides the strongest impact at the beginning of a Fund program, when investors have less information about the IMF program’s success. I demonstrate the plausibility of the theory through interviews with IMF officials and international investors. Then, using annual data from up to 52 emerging market economies from 1998 to 2017, I find robust statistical evidence supporting these claims after addressing the endogeneity issues and selection bias inherent in IMF programs: an IMF program alone does not restore investor confidence. Rather, an IMF program with extensive conditionalities carried out by a popular government does. My findings have important implications for the study of credible commitment and international organizations and the politics of international finance.