Crisis and Recoveries: Multinational Failures and National Successes
Author(s)
Reynolds, Alan
Abstract
Criticism of International Monetary Fund (IMF) lending generally focuses on two issues: 1. the allegedly counterproductive impact of IMF-demanded adjustment programs on the borrowing countries’ economic performance, and 2. the moral hazard effect in which the sheer availability of loans at below-market interest rates encourages more national politicians and their foreign lenders to take imprudent and excessive risk. IMF loans involve moral hazard and IMF programs aggravate rather than alleviate economic crises. Economist Alan Reynolds’ event studies confirm the cross-country studies of Alesina et al. (2002) and Barro (1991) who find reductions in government spending to be expansionary – conducive to economic growth – while higher tax rates are contractionary. IMF policies cannot possibly take credit for post-crisis recoveries unless IMF policies remained in place. But whenever the key IMF policy tools of increasing tax rates and devaluing currencies have remained in place (e.g., Turkey except during the mid-1980s and Argentina except the early 1990s), recoveries are weak, rare, and brief.
