From Crisis to IMF-Supported Program: Does Democracy Impede the Speed Required by Financial Markets?

Ashoka Mody and Diego Saravia

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Growing international financial integration has implied greater threat of contagion across borders, requiring quicker response to crises. However, financial—and trade—integration have been accompanied by the spread of democracy and political participation. Do more voices in the political process impede the need for speed required by financial markets? We find that the Fund’s operational approach, its governance structure, and domestic democratic processes have cooperated to facilitate faster response to financial crises. The time span from a crisis to the negotiation of an IMF program has been smaller the more serious the crisis. The response speed appears to have increased over time, with consideration to a broader range of vulnerabilities, especially to sudden stops in capital inflows. Affiliation to the United States has proved increasingly more valuable for the rapid conclusion of a program. And, democracies are sensitive to time pressures.

Date: 2009-03
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