Lending Credibility
The International Monetary Fund and the
Post- Communist Transition
Randall W. Stone
University of Rochester
The IMF
The most universally despised of
international institutions
Left: Executive committee of int’l capitalism
Right: Big government writ large
Moderates: Criticize tactical mistakes
The Puzzle
Area specialists, qualitative researchers
and practitioners attribute far-reaching
influence to the IMF
• Quantitative scholars have yet to
demonstrate this influence

• How much influence can an international
institution have?
Faulty assumptions
The IMF only exercises influence during
program periods
 IMF intervention has a constant effect
across countries & over time
 IMF intervention is exogenous
 Political constraints are omitted variables

Theory: Desirable Features
The IMF is a strategic actor with a
credibility problem
 Countries vary in “size”
 IMF influence depends on international
investors
 Defection and punishment should happen
in equilibrium
 Inflation is subject to inertia

The Model





Actors: Many investors, n governments, IMF
Actions: Investors may invest, governments
may create inflation, the IMF may disburse a
loan tranche
Preferences: Investors, IMF are averse to
inflation. IMF prefers to disburse. Countries
are tempted to defect, and the temptation is a
random variable
Information: The government’s current level of
temptation is private information
Repetition: Infinite
The Stage Game
•
b
N
•
1-b
I
•
The Stage Game
k
•
0
b
N
•
1-b
I
k
•
0
The Stage Game
gi
•
k
0
•
N
•
1-b
gi
x
•
0
b
x
0
I
k
•
gi
x
•
0
x
gi
0
•
0
The Stage Game
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
•
b
x
IMF
•
0
•
IMF
•
IMF
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IMF
•
IMF
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IMF
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IMF
•
0
s
0
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0
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0
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0
s
0
s
0
•
•
•
•
•
•
•
•
•
•
•
•
•
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•
•
Single-shot Nash
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
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b
x
IMF
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0
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IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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0
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Single-shot Nash
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
•
b
x
IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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0
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Single-shot Nash
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
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•
b
x
IMF
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IMF
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Repeat, repeat…
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
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b
x
IMF
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IMF
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IMF
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0
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•
Repeated game equilibrium
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
•
b
x
IMF
•
0
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IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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0
•
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•
•
Repeated game equilibrium
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
•
b
x
IMF
•
0
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IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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•
Repeated game equilibrium
gi
•
k
N
•
1-b
gi
x
•
0
0
I
k
•
gi
x
•
0
x
gi
0
•
s
IMF 0
s
0
•
b
x
IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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IMF
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Equilibrium (PBE)
IMF plays “hold the line” with small
countries and “tit for tat” with large ones
 Governments defect if the temptation
exceeds a critical value, which depends
on size and whether the program is
suspended
 Investors invest if there was no inflation
in the previous period; interest rates
depend on the size of countries

Comparative Statics
Large countries are subject to shorter
punishment periods
 Large countries defect at a higher rate,
so they are punished more frequently
and pay higher interest rates
 Countries defect more often when
programs are already suspended
 This effect is smaller in large countries

Research Design

Estimate duration model for IMF status
H1: Influence  shorter punishment
H2: Influence  more frequent
punishment

Estimate models of policy variables
H3: Influence  inflation, devaluation
H4: Credibility  low inflation, stability
 Case studies: Russia, Ukraine, Poland,
Bulgaria
Duration of Punishment
Models:
1
2
3
4
IMF Quota
+
+
-
-
-**
-**
-**
-
-
-
-
-
U.S. Aid
appropriation
s
U.S. Aid
disbursement
s
Aid from other
D
C
)
)
(t1)
(t1)
(t6
(t1
le
0.08
ve
s
it
n
re
d
tio
er
C
es
tic
R
es
h
om
In
fla
n
ca
tS
tio
gh
0.29
In
fla
ef
t-r
i
l)
cy
n
0.22
h
*L
ra
tio
ec
le
0.32
C
l)
El
Au
to
c
to
ca
tS
rt
n
Pr
(G
ov
't f
al
th
s
gh
po
ta
tio
1.99
r(G
ov
't f
al
en
)
ts
)
ns
Ai
d
en
ta
ry
Su
p
gm
D
tio
m
ia
pr
se
ur
ro
O
EC
ftri
en
Le
am
sb
pp
Fr
a
(d
i
(a
S
ta
2.0
M
on
rli
Ai
d
Ai
d
-U
Q
uo
0.5
Pa
S
S
on
0.04
U
U
N
IM
F
Duration of Punishment Intervals
3.0
2.66
2.5
2.24
1.97
1.71
1.5
1.23
1.0
0.61
0.72
0.27
0.03
0.0
Duration of Good Standing
Models
IMF Quota
1
2
3
4
+
+
-
-
-*
-**
-**
-
+
-
U.S. Aid
-*** -***
(appropriations)
U.S. Aid
-** -**
(disbursements)
Aid from other
+
+
countries
IM
F
No
Qu
n-U
ota
S
US
OE
Ai
CD
d(
Ai
ap
d
pr
US
op
ria
Ai
d(
tio
di s
ns
)
bu
rse
me
nts
Fr
)
ag
Pa
me
rlia
nta
me
tio
n
nta
ry
Su
pp
or
Le
t
ft-r
i gh
tS
Mo
ca
nth
le
st
oE
lec
tio
n
Au
toc
Pr
ra
(G
cy
ov
Pr
't f
(G
all
ov
)*
't f
Le
all
)
ft-r
i gh
tS
ca
le
Inf
lat
i on
(t1)
Inf
Ch
lat
Do
i on
me
(tsti
6)
cC
re
di t
Ch
(t1)
Re
se
rve
s(
t-1
)
Months
Duration of Program In Good Status
5.0
1.5
0.5
4.75
4.5
4.32
4.0
3.90
0.19
3.79
3.5
3.0
2.85
2.5
2.47
2.0
1.71
1.36
1.83
1.41
1.10
1.10
1.0
0.42
0.11
0.0
Models of Policy Variables
Inflation
Credit
Exchange
Rate
.3312**
(.1674)
.2216***
(.0802)
1.0664
(1.0150)
-.6398
(.5795)
-.1727*
(.1086)
-.0870
(3.4500)
Participant
-3.0528***
(.7282)
-2.6276***
(.5111)
-7.4284*
(4.7868)
IMF Status
4.2098*
(2.6886)
2.7895***
(.5536)
8.4440
(14.4007)
U.S. aid
(appropriations)
U.S. aid
× IMF Status
Substantive effects
Inflation
Credit
Exchang
e rate
Russia
Avg
2.4%
1.6%
8%
Max
7.7%
5.2%
25%
Ukraine
Avg
2.9%
2%
9.7%
Max
5.7%
3.8%
18.5%
Models of Policy Variables
Inflation
Credit
Exchange
Rate
Pr(Punish.
Ends)
3.9140**
(1.8914)
5.0416***
(1.2515)
18.4552**
(8.1547)
Participant
-1.1959**
(.6386)
-.1121
(.4539)
1.9211
(3.0627)
IMF Status
1.7499**
(.7600)
1.8693***
(.5009)
2.1092
(1.9699)
1996 Russian Election
Inflation
Credit
Exchange
Rate
Predicted
(Avg/
month)
0.8%
1%
3.7%
Predicted
(cumulative)
10%
13%
55%
Actual
(cumulative)
22%
48%
16%
Cases: Stylized Facts
Russia & Ukraine
Poland & Bulgaria
•Punished briefly
•Frequent suspensions
•Conditions negotiable
•Crises of 1998
•Punished severely
•Rare suspensions
•Conditions credible
•Crisis of 1997
Conclusions
The IMF has far-reaching influence
 IMF influence is limited if it cannot
credibly commit to enforcing
conditionality

Reform?
Increase the IMF’s independence