Catalytic IMF? A gross flows approach

Aitor Erce and Daniel Riera-Crichton

Working Papers from European Stability Mechanism

Abstract: The financial assistance the International Monetary Fund (IMF) provides is expected to catalyze private capital inflows. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF’s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we document dynamics that are absent from existing models of IMF catalysis. Our results show significant differences in how resident and foreign investors react to IMF programs. While IMF lending does not catalyze foreign capital, it does affect the behavior of resident investors, who are both less likely to place their savings abroad and more likely to repatriate their foreign assets. As domestic banks’ flows drive this effect, we conclude that IMF catalysis is “a banking story”. In comparing the effects across crisis types, we find that the effect of the IMF on resident investors is strongest during sovereign defaults, and that it exerts the least effect on foreign investors during bank crises.

Keywords: IMF; catalysis; residence; capital flows (search for similar items in EconPapers)
JEL-codes: F32 F33 F36 G01 G15 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2015-12-01
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (14)

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