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Mr. Atish R. Ghosh, Mr. Juan Zalduendo, Mr. Alun H. Thomas, Mr. Jun I Kim, Ms. Uma Ramakrishnan, and Mr. Bikas Joshi

the benefits of IMF support go beyond the pure liquidity effects, since the IMF financing variable is significant even controlling for the country’s (gross) foreign exchange reserves. In part, this reflects stronger policies that programs are likely to engender, bolstered by conditionality and with the “seal of approval” implicit in IMF disbursements—strengthened by the IMF’s having its own resources on the line. Finally, while money matters, it is not only money that matters: the marginal benefit of IMF resources on the crisis probability depends on the quality

Mr. Atish R. Ghosh, Mr. Juan Zalduendo, Mr. Alun H. Thomas, Mr. Jun I Kim, Ms. Uma Ramakrishnan, and Mr. Bikas Joshi

the liquidity contribution of IMF resources. Moreover, when both the dummy variable for an on-track program and the IMF financing variable are included (regression R3), or when monetary and fiscal policies under the program are included (regression R4), the IMF financing variable remains significant. An alternative formulation (not reported) where IMF financing is defined as the full amount of IMF resources that can be accessed over the life of the arrangement is not significant, suggesting that disbursed IMF financing (or accumulated drawing rights in the case of

Mr. Atish R. Ghosh, Mr. Juan Zalduendo, Mr. Alun H. Thomas, Mr. Jun I Kim, Ms. Uma Ramakrishnan, and Mr. Bikas Joshi

Abstract

The financial crises that struck a number of emerging market countries in the 1990s and early twenty-first century were characterized by sudden reversals of capital flows that had pervasive macroeconomic consequences, including abrupt current account adjustment and collapsing real exchange rates and economic activity (Figure 2.1).1 But while the consequences of these crises were broadly similar, their causes appear to be quite different. Turkey (1993), Mexico (1994), and Russia (1998) experienced public sector funding crises. In contrast, the 1997 East Asian crises were mainly private sector phenomena. In Brazil (1998–99), Turkey (2000–01), and Argentina (2002) public sector debt dynamics played a key role; in Turkey, it was both a financial crisis and a banking crisis, while in Argentina, along with the public sector financing problem, there was a run on the banking system, which brought down the currency board and led to currency depreciation and default, as well as a banking crisis. On the other hand, Uruguay (2002) experienced a banking crisis caused by withdrawals of Argentine deposits that spilled into a public sector debt problem and a balance of payments crisis.

Mr. Atish R. Ghosh, Mr. Juan Zalduendo, Mr. Alun H. Thomas, Mr. Jun I Kim, Ms. Uma Ramakrishnan, and Mr. Bikas Joshi

Abstract

The discussion in the previous section suggests where balance sheet vulnerabilities might lurk and how they may interact with specific triggers that result in a full-blown crisis. The first step in crisis prevention is to try to avoid such vulnerabilities—in particular, to ensure that the government is not (perhaps inadvertently) providing incentives that exacerbate balance sheet mismatches. It is a truism that sound macroeconomic policies also lessen—but do not eliminate—the possibility that a crisis will be triggered.

Mr. Atish R. Ghosh, Mr. Juan Zalduendo, Mr. Alun H. Thomas, Mr. Jun I Kim, Ms. Uma Ramakrishnan, and Mr. Bikas Joshi

Abstract

This paper examines the various roles of IMF financing in crisis prevention. Emerging market economies that experienced financial crises in the past have been subject to enormous economic and social costs, highlighting the importance of crisis prevention. While the main defense against a crisis lies in a country’s own policies and institutional framework, the IMF can contribute to these efforts through its surveillance activities, provision of technical assistance, and promotion of standards and codes. But the IMF may be able to contribute to crisis prevention more directly by providing contingent financial support. This paper explores the theoretical basis of, and empirical evidence for, possible “crisis prevention programs.”

Ms. Uma Ramakrishnan and Mr. Juan Zalduendo
This paper examines the role of IMF-supported programs in crisis prevention; specifically, whether, conditional on an episode of intense market pressures, IMF financial support helps prevent a capital account crisis from developing and, if so, through what channels. In doing so, the paper distinguishes between the seal of approval inherent in IMF support and its financing, evaluates the interaction of IMF support with economic policies, and assesses whether IMF financing has a different impact on the likelihood of a crisis than other forms of liquidity. The main result is that IMF financing helps prevent crises through the liquidity provided (i.e., money matters). However, since the effect holds even after controlling for (gross) foreign exchange reserves, stronger policies and the seal of approval under an IMFsupported program must also play a role. Finally, the results suggest that IMF financing as a crisis prevention tool is most effective for an intermediate range of economic fundamentals.
Ms. Uma Ramakrishnan and Mr. Juan Zalduendo

empirical literature on IMF-supported programs, this paper uses the ratio of available resources to short-term debt in the four quarters up to each period. 26 Table 2 provides summary statistics of the IMF financing variable for the precrisis period. 27 The sample of 32 episodes is quite balanced between KAC and CG episodes and between observations with and without IMF financing. Specifically, about one-third of all observations are KACs and two-thirds are in the control group. Also, about 40 percent of KAC episodes have IMF resources available prior to the emergence

Mr. Mauro Mecagni, Mr. Ruben V Atoyan, and Mr. David J Hofman

as an instrument. While the estimation results are robust to the choice of lag, the second lag yields the highest likelihood value. 18 In the specifications with time dependency, the exchange rate regime has p-values of 0.13 and 0.17 in regressions 2a and 3a, respectively. 19 By construction, the cumulative IMF financing variable increases with time. Similarly, a shift toward greater exchange rate flexibility (higher indices denote more flexible exchange rate regimes) is also likely to display some correlation with the time variable. These features are

Mr. Mauro Mecagni, Mr. Ruben V Atoyan, and Mr. David J Hofman
This study contributes to the literature on capital account crises in two ways. First, our analysis of crisis episodes between 1994 and 2002 establishes a clear relationship between the persistence of crises, their complexity, and the intensity of movement of key macroeconomic variables. Second, we provide a systematic examination of the determinants of crisis duration. Our econometric analysis suggests that initial conditions and the external environment plays a key role in determining crisis persistence. The policy response also matters, but cannot offset a record of poor past policies. Overall, the results underscore the critical importance of crisis prevention efforts.
Mr. David J Hofman, Mr. Ruben V Atoyan, Dimitri Tzanninis, and Mr. Mauro Mecagni

. 39 In the specifications with time dependency, the exchange rate regime has p-values of 0.13 and 0.17 in regressions 2a and 3a, respectively. 40 By construction, the cumulative IMF financing variable increases with time. Similarly, a shift toward greater exchange rate flexibility (higher indices denote more flexible exchange rate regimes) is also likely to display some correlation with the time variable. These features are likely to introduce multicollinearity in specifications that include the time variable component of the hazard function. 41 While it