On US Politics and IMF Lending

European Economic Review DOI: 10.1016/j.euroecorev.2005.07.001

Posted: 14 Dec 2014

See all articles by Finn Tarp

Finn Tarp

University of Copenhagen - Department of Economics

Thomas Barnebeck Andersen

University of Southern Denmark - Department of Business and Economics

Thomas Herr

Independent

Date Written: January 2006

Abstract

The political factors shaping IMF lending to developing countries have attracted attention in recent empirical work. This goes in particular for the role and influence of the US. However, scant formal modelling makes interpretation of empirical results difficult. In this paper, we propose a model in which the US acts as principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive an optimal loan allocation mechanism, which leads to the testable hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country's bliss point and its actual policy stance measured relative to the US. We introduce a bliss-point proxy and demonstrate that our hypothesis is strongly supported in the data. Moreover, we show that not accounting for bliss points may lead to endogeneity bias in empirical work.

Suggested Citation

Tarp, Finn and Andersen, Thomas Barnebeck and Herr, Thomas, On US Politics and IMF Lending (January 2006). European Economic Review DOI: 10.1016/j.euroecorev.2005.07.001 , Available at SSRN: https://ssrn.com/abstract=2537764

Finn Tarp (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Thomas Barnebeck Andersen

University of Southern Denmark - Department of Business and Economics ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Thomas Herr

Independent ( email )

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