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International Tax and Public Finance

, Volume 22, Issue 5, pp 705–722 | Cite as

IMF conditionalities, liquidity provision, and incentives for fiscal adjustment

  • Bernardo GuimaraesEmail author
  • Oz Iazdi
Article

Abstract

This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance toward immediate liquidity provision.

Keywords

IMF Conditionality Fiscal adjustment Liquidity provision  Sudden stop 

JEL Classification

F33 F34 H63 

Notes

Acknowledgments

We thank the editor Andreas Haufler, Enlinson Mattos, Mauro Rodrigues Jr, André Portela Souza, two anonymous referees and seminar participants at the ANPEC Meeting 2013 (Iguaçu) and the Sao Paulo School of Economics – FGV for helpful comments. Bernardo Guimaraes gratefully acknowledges financial support from CNPq.

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Sao Paulo School of Economics – FGVSão PauloBrazil

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