A country typically summons the IMF when its economy faces an imminent crisis that threatens the national financial system. The IMF bailout aims to put the country on solid financial ground by providing funds to finance budget deficits and debt repayments, as well as recapitalize insolvent banks. This traditional solution can help avoid sovereign debt defaults, insolvency, and capital flight. However, IMF bailouts are typically accompanied by large austerity programs that may have short-term negative consequences. These policies impose harsh structural adjustment and de-leveraging requirements, which are not tailored to the recipient country’s economic status and cultural background.
There is a growing interest in investigating the effectiveness of international official lending, and several scholars have attempted to analyze the effects of IMF bailouts. But a few important issues remain unexplored. For example, Dreher (2006) found that the IMF program has a negative impact on bailed-out countries, but this result could be due to insufficient research methodology or choice of events and variables.
Furthermore, studies that investigate moral hazard issues surrounding IMF bailouts face many challenges. The excessive risk-taking behavior of creditors and debtors can be difficult to observe, and the effect of IMF bailouts on their behaviors cannot be easily separated from other macroeconomic factors. Thus, future research is needed to develop the optimal research methodologies for this area. In addition, more research on corporate governance of IMF and debtor countries is also required. Moreover, the effects of bailouts on the financial engineering of these two entities need to be considered as well.
About the Author
