Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53950 
Year of Publication: 
2007
Series/Report no.: 
Bank of Canada Working Paper No. 2007-22
Publisher: 
Bank of Canada, Ottawa
Abstract: 
The author studies the welfare implications of adjustment programs supported by the International Monetary Fund (IMF). He uses a model where an endogenous borrowing constraint, set up by international lenders who will never lend more than a debt ceiling, forces the borrowing economy to always choose repayment over default. The immediate potential welfare cost of joining a program is driven by IMF conditionality: to be able to borrow from the IMF, the country has to submit to limits on the consumption of public goods. The benefits derive from the additional borrowing from the IMF (at a lower interest rate) and/or through a "catalytic effect" on private loans, which facilitates consumption smoothing over time. Simulations of the dynamic model in two institutional environments - with and without the IMF - are compared. Results indicate that when conditionality forces the country to save more, at a cost that does not prevent it from joining an IMF program, the resulting lower probability of default can induce private lenders to relax their borrowing constraints. Based on a calibration of the model for the Brazilian economy, the overall welfare gains associated with IMF programs are relatively small.
JEL: 
F32
F33
F34
F41
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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