Can IMF Program Design Resurrect Investor Sentiment? An Empirical Investigation

Abstract

Does international investor sentiment improve when a crises-ridden country participates in an IMF program? I argue that merely participating in an IMF program may not revive the sentiments of investors. Rather, investor sentiment would improve when governments enhance the credibility of their commitment to reforms by accepting severe conditions imposed by the Fund which incur ex ante and ex post political costs. Using panel data on 166 countries during the 1992–2013 period (22 years), I find that countries participating in IMF programs with conditions attached, specifically performance criteria conditions, after controlling for self-selection bias, are associated with an increase in long-term investor sentiment. Furthermore, investor sentiment in countries hit by debt, banking, and currency crises is resurrected in the subsequent years as a result of the IMF conditions. These results are robust to controlling for endogeneity and using alternative estimation methods. My findings are in stark contrast to those who argue that IMF conditional programs are akin to swallowing a bitter pill. In fact, my results demonstrate that the so-called bitter pill may act as a palliative.