The political economy of IMF conditionality and central bank independence

International organizations (IOs) often drive policy change in member countries. Given IOs' limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government's ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.     

Must conditional cash transfer programs be conditioned to be effective? The impact of conditioning transfers on school enrollment in Mexico

A growing body of evidence suggests that conditional cash transfer (CCT) programs can have strong, positive effects on a range of welfare indicators for poor households in developing countries. However, there is little evidence about how important each component of these programs is towards achieving these outcomes. This paper tests the importance of conditionality on one specific outcome related to human capital formation, school enrollment, using data collected during the evaluation of Mexico's PROGRESA program. We exploit the fact that some beneficiaries who received transfers did not receive the forms needed to monitor the attendance of their children at school. We use a variety of techniques, including nearest neighbor matching and household fixed effects regressions, to show that the absence of these forms reduced the likelihood that children attended school with this effect most pronounced when children are transitioning to lower secondary school. We provide substantial evidence that these findings are not driven by unobservable characteristics of households or localities.     

Why conditional aid does not work and what can be done about it?

This paper studies a simple reform that introduces ex post incentives for the donor to reward good policies—contrary to existing practices. Instead of committing aid to each recipient ex ante and making aid conditional on reform, the donor centralizes the disbursement decision by committing aid to a group of countries. The actual amount disbursed to each individual country would depend on its relative performance. This explicit linkage of the allocation and disbursement decisions has two important advantages as compared to present practices. First, it raises the opportunity cost of disbursing aid ex post, thereby giving the donor stronger incentives to reward good policies. Second, competition among recipients allows the donor to make inferences about common shocks, which otherwise conceal the recipient's choice of action. This enables the donor to give aid more efficiently.     

The accuracy of IMF crises nowcasts

The International Monetary Fund (IMF) provides loans to countries in economic crises as a lender of last resort. IMF loan approvals are tied to policy reforms and quantitative targets that reflect the IMF’s crisis assessment. An extensive literature scrutinizes the efficacy of IMF loan programs, instead, we examine the accuracy of the IMF’s crisis assessments (nowcasts) that predicate program designs. Analyzing an unprecedented 602 IMF loan programs from 1992 to 2019, we contradict previous findings that IMF nowcasts are generally optimistic. Disentangling the structure of the IMF’s nowcast bias, we find the IMF systematically overestimates high-growth recoveries GDPs, while low-growth recoveries for low-income countries (LICs) are underestimated. In contrast, non-LICs’ nowcasts exhibit no statistically significant optimistic and pessimistic bias. Interestingly, shorter nowcast horizons do not improve accuracy, and GDP growth nowcasts improved substantially since 2013, while inflation nowcasts remain inefficient. We also isolate the sources of IMF nowcast inefficiencies according to ((i) program objectives, ((ii) program conditionality type, ((iii) geographic regions, ((iv) global crises, and ((v) geopolitics (elections, conflicts, and disasters).     

The effectiveness of conditionality and the political economy of policy reform: is it simply a matter of political will?

Although widely used by international financial institutions, policy conditionality often fails in the sense that countries do not fully implement it. Up to now most research has focused on the design of conditionality. This paper, however, uses political economy analysis to address the issue of non-compliance. Either governments agree to conditions with little intention of carrying them through, or circumstances change the benefit-cost ratio of compliance. Analysis of these circumstances points to ways in which conditionality might usefully be reformed.     

Designing REDD+ contracts to resolve additionality issues

To address the issue of potential information asymmetries inherent in the estimation of deforestation baselines required by the current Reducing Emissions from Deforestation and Forest Degradation+ (REDD+) scheme, we offer a theoretical analysis of an extended scheme relying on the theory of incentives. We compare two types of contracts: a deforestation-based contract and a policy-based contract. Each of them implies a dramatically different information rent/efficiency trade-off due to domestic implementation and transaction costs. If the contract is deforestation-based (resp. policy-based), information rents are awarded to countries with the ex ante lowest (resp. highest) intended deforestation. We show that a general contract can be offered to recipient countries in which the type of instrument proposed is endogenous, independent of the historical trend, unlike the current REDD+ mechanism. Dividing countries into two groups corresponding to the deforestation-based instrument and the policy-based instrument helps the donor country to obtain efficient deforestation and avoided deforestation levels.     

Sovereign debt, structural adjustment, and conditionality

The lack of a proper enforcement mechanism for sovereign debt generates a commitment failure. As a result, a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports. Conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure. Formalizing this argument, we show that conditionality helps the repayment of sovereign debt. In certain circumstances, it can eliminate debt overhang, especially when it is coupled with concessionary lending of sufficient magnitude. It is, however, unable to restore first best. When it is anticipated by lenders, conditionality may get international financial institutions and sovereign debtors into a trap where the debt overhang persist, debt rescheduling takes place periodically, and conditionality continues indefinitely.