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Mixed Signals: IMF Lending and Capital Markets

  • Terrence Chapman, Songying Fang, Xin Li and Randall W. Stone


The effect of new International Monetary Fund (IMF) lending announcements on capital markets depends on the lender’s political motivations. There are conditions under which lending reduces the risk of a deepening crisis and the risk premium demanded by market actors. Yet the political interests that make lenders willing to lend may weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net ‘catalytic’ effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings in the literature about market reactions. This study tests the implications of the theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans and measures of the geopolitical interests of the United States, a key IMF principal.



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Department of Government, University of Texas at Austin (e-mail:; Department of Political Science, Rice University (e-mail:; Department of Economics, Rice University (e-mail:; Department of Political Science, University of Rochester (e-mail: We thank Mike Findley, Christopher Kilby, Colin Krainin, Pat McDonald, Siyang Xiong, Harrison Wagner, participants at the April 2011 conference on Informal Governance in International Institutions at the University of Rochester and the May 2013 Princeton University conference on theoretical and quantitative international relations, and audiences at the University of Wisconsin-Madison, the University of Illinois, Emory University and Stanford University for helpful suggestions. Data replication sets are available at



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Mixed Signals: IMF Lending and Capital Markets

  • Terrence Chapman, Songying Fang, Xin Li and Randall W. Stone


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