, Volume 5, Issue 2, pp 107-139
Date: 25 Feb 2010

Does compliance matter? Assessing the relationship between sovereign risk and compliance with international monetary law

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Abstract

An important theory of international cooperation asserts that governments comply with international law because of the reputational costs incurred by reneging on public agreements. Countries that sign binding international agreements in the realm of monetary relations signal their commitment to an open economic system, which should reassure international market actors that the government is committed to sound economic policies. If the theory is correct, we should observe evidence that noncompliance is in fact costly. I test this argument by examining the effect of noncompliance with Article VIII of the IMF’s Articles of Agreement on sovereign risk ratings. The results show that noncompliance with the agreement mitigates any benefits that accrue to Article VIII signatories. The empirical evidence suggests that, in addition to improving economic and political conditions at home, governments in the developing world would improve their access to financial markets by signing and complying with international monetary agreements.

I thank Asaf Zussman, the participants at the graduate student colloquium at Cornell University, the anonymous reviewers and the editor of this journal for very helpful comments. I thank Beth Simmons and Daniel Hopkins for kindly sharing their data on Article VIII compliance. Christopher Way deserves particular thanks for his advice at every stage in the project. Any errors or omissions remain my own.