The credibility and signalling effect of IMF programmes

Abstract

The IMF claims that the conditionality it attaches to its loans performs an important signalling function (IMF Survey, March 24, 1997). By negotiating a programme with the IMF a government signals its intention to implement an agreed programme of economic stabilisation and reform which is designed to enhance economic performance. Governments could, of course, commit themselves to similar policies outside the Fund. But, so the argument goes, in these circumstances pronouncements about economic reform would carry relatively little credibility with private international capital markets and aid donors, since there would be nothing much to stop governments reneging on their policy promises. There is a time consistency problem. What governments say may not be what they do.1 To overcome this problem they may choose to delegate elements of policy to independent policy-makers, giving up the control that it is feared they may misuse. Thus monetary policy may be delegated to an independent central bank free from political manipulation. Or macroeconomic policy may be constrained by a set of rules rather than being set purely by discretion. Policy-makers may opt to “tie their hands” in order to