IMF conditionalities, liquidity provision, and incentives for fiscal adjustment

Bernardo Guimaraes and Oz Iazdi

International Tax and Public Finance, 2015, vol. 22, issue 5, 705-722

Abstract: This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance toward immediate liquidity provision. Copyright Springer Science+Business Media New York 2015

Keywords: IMF; Conditionality; Fiscal adjustment; Liquidity provision; Sudden stop; F33; F34; H63 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: IMF CONDITIONALITIES, LIQUIDITY PROVISION AND INCENTIVES FOR FISCAL ADJUSTMENT (2014)
Working Paper: IMF conditionalities, liquidity provision, and incentives for fiscal adjustment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:22:y:2015:i:5:p:705-722

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DOI: 10.1007/s10797-014-9329-9

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