The political economy of IMF forecasts

Abstract

We investigate the political economy of IMF forecasts with data for 157 countries (1999–2005). Generally, we find evidence of forecast bias in growth and inflation. Specifically, we find that countries voting with the United States in the UN General Assembly receive lower inflation forecasts as domestic elections approach. Countries with large loans outstanding from the IMF also receive lower inflation forecasts, suggesting that the IMF engages in “defensive forecasting.” Finally, countries with fixed exchange rate regimes receive lower inflation forecasts, suggesting the IMF desires to preserve stability as inflation can have detrimental effects under such an exchange rate regime.

This is a preview of subscription content, log in to check access.

References

  1. Aldenhoff, F. O. (2007). Are economic forecasts of the International Monetary Fund politically biased? A public choice analysis. Review of International Organizations, 2(3), 239–260. doi:10.1007/s11558-006-9010-x.

    Article  Google Scholar 

  2. Andersen, T. B., Hansen, H., & Markussen, T. (2006). US politics and World Bank IDA-lending. Journal of Development Studies, 42(5), 772–794. doi:10.1080/00220380600741946.

    Article  Google Scholar 

  3. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277–297. doi:10.2307/2297968.

    Article  Google Scholar 

  4. Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. doi:10.1016/0304-4076(94)01642-D.

    Article  Google Scholar 

  5. Artis, M. J. (1988). How accurate is the world economic outlook? A post mortem on short-term forecasting at the International Monetary Fund. Staff studies for the world economic outlook, International Monetary Fund, Washington, 1–49.

  6. Artis, M. J. (1997). How accurate are the WEO’s short-term forecasts? An examination of the world economic outlook. Staff studies for the world economic outlook, International Monetary Fund, Washington.

  7. Barro, R. J., & Lee, J. W. (2005). IMF-programs: Who is chosen and what are the effects? Journal of Monetary Economics, 52, 1245–1269. doi:10.1016/j.jmoneco.2005.04.003.

    Article  Google Scholar 

  8. Barrionuevo, J. M. (1993). How accurate are the world economic outlook projections? Staff studies for the world economic outlook, International Monetary Fund, Washington, pp. 28–46.

  9. Batchelor, R. (2000). The IMF and OECD versus consensus forecasts. City University Business School, London, August 2000.

  10. Beach, W. W., Schavey, A. B., & Isidro, I. M. (1999). How reliable are IMF economic forecasts? Heritage Foundation CDA 99-05.

  11. Beck, T., Clarke, G., Groff, A., Keefer, P., & Walsh, P. (1999). New tools and new tests in comparative political economy. The Database of Political Institutions, Development Research Group, The World Bank, Groff: Federal Department of Foreign Affairs (Switzerland).

  12. Bird, G., & Rowlands, D. (2003). Political economy influences within the life-cycle of IMF programmes. World Economy, 26, 1255–1278. doi:10.1046/j.1467-9701.2003.00572.x.

    Article  Google Scholar 

  13. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. doi:10.1016/S0304-4076(98)00009-8.

    Article  Google Scholar 

  14. Brambor, T., Clark, W., & Golder, M. (2005). Understanding interaction models: Improving empirical analyses. Political Analysis, 14, 63–82. doi:10.1093/pan/mpi014.

    Article  Google Scholar 

  15. Broz, J. L., & Hawes, M. B. (2006). US domestic politics and International Monetary Fund Policy. In D. Hawkins, D. A. Lake, D. Nielson, & M. J. Tierney (Eds.), Delegation and agency in international organizations (pp. 77–196). Cambridge: Cambridge University Press.

    Google Scholar 

  16. Clark, W., Gilligan, M., & Golder, M. (2006). A simple multivariate test for asymmetric hypotheses. Political Analysis, 14, 311–331. doi:10.1093/pan/mpj018.

    Article  Google Scholar 

  17. Copelovitch, M. (2007). Master or servant? Agency slack and the politics of IMF lending. Manuscript, Department of Political Science, University of Wisconsin, Madison.

  18. Crawford, V., & Sobel, J. (1982). Strategic information transmission. Econometrica, 50, 1431–1451. doi:10.2307/1913390.

    Article  Google Scholar 

  19. Dewatripont, M., Jewitt, I., & Tirole, J. (1999). The economics of career concern. The Review of Economic Studies, 66(1), 183–217. doi:10.1111/1467-937X.00084.

    Article  Google Scholar 

  20. Dreher, A. (2004). A public choice perspective of IMF and World Bank lending and conditionality. Public Choice, 119(3–4), 445–464. doi:10.1023/B:PUCH.0000033326.19804.52.

    Article  Google Scholar 

  21. Dreher, A. (2006). IMF and economic growth: The effects of programs, loans, and compliance with conditionality. World Development, 34(5), 769–788. doi:10.1016/j.worlddev.2005.11.002.

    Article  Google Scholar 

  22. Dreher, A., & Jensen, N. M. (2007). Independent actor or agent? An empirical analysis of the impact of US interests on IMF conditions. The Journal of Law and Economics, 50(1), 105–124. doi:10.1086/508311.

    Article  Google Scholar 

  23. Dreher, A., & Sturm, J.-E. (2006). Do IMF and World Bank influence voting in the UN General Assembly? KOF working paper 137. ETH Zürich.

  24. Dreher, A., & Vaubel, R. (2007 fortcoming). Foreign exchange intervention and the political business cycle: A panel data analysis. Journal of International Money and Finance.

  25. Dreher, A., Sturm, J.-E., & Vreeland, J. R. (2006). Does membership on the UN Security Council influence IMF decisions? Evidence from panel data. KOF working paper 151. ETH Zürich.

  26. Dreher, A., Sturm, J.-E., & Vreeland, J.R. (2008, in press). Development aid and international politics: Does membership on the UN Security Council influence World Bank decisions? Journal of Development Economics.

  27. Faini, R., & Grilli, R. (2004). Who runs the IFIs? CEPR discussion paper No. 4666.

  28. Fratianni, M., & Pattison, J. (2005). Who is running the IMF: Critical shareholders or the staff? In P. Gijsel & H. Schenk (Eds.), Multidisciplinary economics: The birth of a new economics faculty in the Netherlands (pp. 279–292). Berlin: Springer.

    Google Scholar 

  29. Frey, B. S., & Schneider, F. (1986). Competing models of international lending activity. Journal of Development Economics, 20(2), 225–245. doi:10.1016/0304-3878(86)90022-2.

    Article  Google Scholar 

  30. Frey, B. S., Schneider, F., Horn, H., & Persson, T. (1985). A formulation and test of a simple model of World Bank behavior. Weltwirtschaftliches Archiv, 121(3), 438–447. doi:10.1007/BF02708182.

    Article  Google Scholar 

  31. Gisselquist, D. (1981). The political economy of International Bank lending. New York: Praeger.

    Google Scholar 

  32. Goldsbrough, D., Barnes, K., Mateos y Lago, I., & Tsikata, T. (2002). Prolonged use of IMF loans. Finance and Development, 39, 1–7.

    Google Scholar 

  33. Gould, E. R. (2003). Money talks: Supplemental financiers and International Monetary Fund conditionality. International Organization, 57(3), 551–586.

    Article  Google Scholar 

  34. Gould, E. R. (2006). Money talks: The International Monetary Fund conditionality and supplemental financiers. Stanford: Stanford University Press.

    Google Scholar 

  35. Hacche, G. (2007). A non-definitive guide to the IMF. World Economics, 8(2), 97–118.

    Google Scholar 

  36. Holden, K., & Peel, D. A. (1990). On testing for unbiasedness and efficiency of forecasts. Manchester School of Economic and Social Studies, 58, 120–127.

    Article  Google Scholar 

  37. IMF (1998) Documentation MULTIMOD Mark III, the core dynamic and steady-state models. IMF occasional paper No. 164.

  38. IMF (various years) World economic outlook: Financial systems and economic cycles. Washington DC: International Monetary Fund.

  39. IMF (2006). International financial statistics: CD-Rom. Washington DC: International Monetary Fund.

    Google Scholar 

  40. Kahler, M. (1990). The United States and the International Monetary Fund: Declining influence or declining interest? In M. P. Karns & K. A. Mingst (Eds.), The United States and Multilateral Institutions (pp. 91–114). Boston: Unwin Hyman.

    Google Scholar 

  41. Kenen, P. B., & Schwartz, B. S. (1986). The assessment of macroeconomic forecasts in the International Monetary Fund’s world economic outlook. Working papers in international economics, No. G-86-40, Princeton University.

  42. Lagerspetz, E. (1999). Rationality and politics in long-term decisions. Biodiversity and Conservation, 8, 149–164. doi:10.1023/A:1008821427812.

    Article  Google Scholar 

  43. Levy-Yeyati, E., & Sturzenegger, F. (2005). Classifying exchange rate regimes: Deeds vs. words. European Economic Review, 49(6), 1603–1635. doi:10.1016/j.euroecorev.2004.01.001.

    Article  Google Scholar 

  44. Loungani, P. (2000). How accurate are private sector forecasts? Cross-country evidence from consensus forecasts of output growth. IMF working paper 00/77. International Monetary Fund, Washington, DC.

  45. Loxley, J. (1986). Debt and disorder: External financing for development. Boulder: Westview Press.

    Google Scholar 

  46. Marchesi, S. (2003). Adoption of an IMF programme and debt rescheduling. An empirical analysis. Journal of Development Economics, 70(2), 403–423. doi:10.1016/S0304-3878(02)00103-7.

    Article  Google Scholar 

  47. Marchesi, S., & Sabani, L. (2007a). Prolonged use and conditionality failure: Investigating the IMF responsibility. In G. Mavrotas & A. Shorrocks (Eds.), Advancing development: Core themes in global economics (pp. 319–332). New York: Palgrave–Macmillan.

    Google Scholar 

  48. Marchesi, S., & Sabani, L. (2007b). IMF concern for reputation and conditional lending failure: Theory and empirics. Journal of Development Economics, 84, 640–666. doi:10.1016/j.jdeveco.2007.01.001.

    Article  Google Scholar 

  49. Marchesi, S., & Thomas, J. (1999). IMF conditionality as a screening device. The Economic Journal, 109, 111–125. doi:10.1111/1468-0297.00420.

    Article  Google Scholar 

  50. Morris, S., & Shin, H. S. (2006). Catalytic finance: When does it work? Journal of International Economics, 70, 161–177. doi:10.1016/j.jinteco.2005.06.014.

    Article  Google Scholar 

  51. Nickell, S. J. (1981). Biases in dynamic models with fixed effects. Econometrica, 49, 802–816. doi:10.2307/1911408.

    Article  Google Scholar 

  52. Oatley, T., & Yackee, J. (2004). American interests and IMF lending. International Politics, 41(3), 415–429. doi:10.1057/palgrave.ip.8800085.

    Article  Google Scholar 

  53. Ottaviani, M., & Sørensen, P. N. (2006). The strategy of professional forecasting. Journal of Financial Economics, 81, 441–466. doi:10.1016/j.jfineco.2005.08.002.

    Article  Google Scholar 

  54. Przeworski, A., & Vreeland, J. (2000). The effect of IMF programs on economic growth. Journal of Development Economics, 62, 385–421. doi:10.1016/S0304-3878(00)00090-0.

    Article  Google Scholar 

  55. Pons, J. (2000). The accuracy of IMF and OECD forecasts for G7 countries. Journal of Forecasting, 19(1), 53–63. doi:10.1002/(SICI)1099-131X(200001)19:1<53::AID-FOR736>3.0.CO;2-J.

    Article  Google Scholar 

  56. Ramcharan, R. (2003). Reputation, debt and policy conditionality. IMF working paper No. 192.

  57. Ramcharan, R. (2001). Just say no! (More often) IMF lending and policy reform. Mimeo.

  58. Reinhart, C. M., Rogoff, K. S., & Savastano, M. A. (2003). Debt intolerance. Brookings Papers on Economic Activity, 2003(1), 1–74.

    Article  Google Scholar 

  59. Rieffel, L. (2003). Restructuring sovereign debt: The case for ad-hoc machinery. Washington: Brookings Institution Press.

    Google Scholar 

  60. Roodman, D. (2005). xtabond2: Stata module to extend xtabond dynamic panel data estimator. Center for Global Development, Washington, DC. http://ideas.repec.org/c/boc/bocode/s435901.html. Accessed 15 March 2007.

  61. Russett, B. M. (1967). International regions and the international system. Chicago: Rand McNally.

    Google Scholar 

  62. Steinwand, M., & Stone, R. W. (2008). The International Monetary Fund: A review of the recent evidence. Review of International Organizations. doi:10.1007/s11558-007-9026-x.

    Google Scholar 

  63. Stone, R. W. (2002). Lending credibility: The International Monetary Fund and the post-communist transition. Princeton: Princeton University Press.

    Google Scholar 

  64. Stone, R. W. (2004). The political economy of IMF lending in Africa. American Political Science Review, 98(4), 577–592.

    Article  Google Scholar 

  65. Thacker, S. C. (1999). The high politics of IMF lending. World Politics, 52, 38–75.

    Google Scholar 

  66. Timmermann, A. (2007). An evaluation of the world economic outlook forecasts. IMF Staff Papers, 54(1), 1–33. doi:10.1057/palgrave.imfsp.9450007.

    Article  Google Scholar 

  67. Vaubel, R. (1986). A public choice approach to international organizations. Public Choice, 51, 39–57. doi:10.1007/BF00141684.

    Article  Google Scholar 

  68. Vaubel, R. (1991). Problems at IMF. Swiss Review of World Affairs, 40, 20–22.

    Google Scholar 

  69. Vaubel, R. (1996). Bureaucracy at the IMF and the World Bank: A comparison of the evidence. World Economy, 19, 195–210. doi:10.1111/j.1467-9701.1996.tb00672.x.

    Article  Google Scholar 

  70. Vaubel, R. (2006). Principal-agent problems in international organizations. Review of International Organizations, 1(2), 125–138.

    Article  Google Scholar 

  71. Voeten, E. (2004). Documenting votes in the UN General Assembly. Political Science and International Affairs, The George Washington University.

  72. Vreeland, J. R. (2003). The IMF and economic development. New York: Cambridge University Press.

    Google Scholar 

  73. Vreeland, J. R. (2005). The international and domestic politics of IMF programs. Mimeo, Yale University.

  74. Vreeland, J. R. (2006). Self reform: The IMF strategy. Prepared for the reinventing Bretton Woods Committee and world economic forum conference, Cape Town, 29–30 May 2006.

  75. Vreeland, J. R. (2007). The International Monetary Fund: Politics of conditional lending. New York: Routledge.

    Google Scholar 

  76. Weck-Hannemann, H., & Schneider, F. (1991). Determinants of foreign aid under alternative institutional arrangements. In R. Vaubel & T. D. Willett (Eds.), The political economy of international organizations: A public choice approach (pp. 245–266). Boulder: Westview Press.

    Google Scholar 

  77. Willett, T. D. (2000). A soft core public choice analysis of the International Monetary Fund., Claremont Colleges working paper, 2000-56.

  78. Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25–51. doi:10.1016/j.jeconom.2004.02.005.

    Article  Google Scholar 

  79. Wittkopf, E. (1973). Foreign aid and United Nations votes: A comparative study. American Political Science Review, 67(3), 868–888. doi:10.2307/1958630.

    Article  Google Scholar 

  80. Woods, N. (2003). The United States and the international financial institutions: Power and influence within the World Bank and the IMF. In R. Foot, N. McFarlane, & M. Mastanduno (Eds.), US hegemony and international organizations (pp. 92–114). Oxford: Oxford University Press.

    Google Scholar 

  81. World Bank (2006a). World development indicators. Washington: CD-Rom.

    Google Scholar 

  82. World Bank (2006b). Global development finance. Washington: CD-Rom.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Axel Dreher.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Dreher, A., Marchesi, S. & Vreeland, J.R. The political economy of IMF forecasts. Public Choice 137, 145–171 (2008). https://doi.org/10.1007/s11127-008-9318-6

Download citation

Keywords

  • IMF
  • Economic forecasts
  • Political influence

JEL Classification

  • C23
  • D72
  • F33
  • F34