IMF Conditionality as a Screening Device

Silvia Marchesi and Jonathan Thomas

Economic Journal, 1999, vol. 109, issue 454, C111-25

Abstract: A theoretical model is developed in that both buybacks and the adoption of an IMF program can be used as screening devices that enable a creditor to discriminate between debtor countries that are willing to use debt relief in order to invest and repay and countries that are not. Asymmetric information is assumed. This problem can be solved if the country has sufficient resources to engage in a debt buyback and so gain the debt relief. When the country is credit constrained, an alternative screening mechanism is to undertake an IMF program in return for debt reduction and possibly an IMF loan.

Date: 1999
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