Giancarlo Corsetti and Nouriel Roubini
Catalytic IMF Finance in Emerging Economies
Crises: Theory and Empirical Evidence
Hotel "Grand Villa Argentina",
Dubrovnik
Draft version
June 23 - 26, 2004
Please do not quote
The Tenth Dubrovnik
Economic Conference
Catalytic IMF Finance in Emerging
Economies Crises:
Theory and Empirical Evidence
by
Giancarlo Corsetti
(European University Institute)
and
Nouriel Roubini
(New York University)
Preliminary
First Draft: June 2004
Abstract
This paper presents an overview of the theory and empirical evidence on the IMF
catalytic finance approach based on the experience with capital account crises in the last
decade. While many previous studies on catalytic finance had found mixed, if not
outright negative, evidence on the effectiveness of the catalytic approach the results of
this paper, based on the eleven case studies of catalytic finance in the last ten years, are
more positive. The analysis of many crisis episodes suggest a number of lessons,
including: first, large-scale catalytic financing works better when debt levels are low and
the country’s commitment to reform is credible; second, large loans to countries with
large debt levels are unlikely to be repaid quickly. third, rollover arrangements can
complement “catalytic” financing. Overall, the empirical evidence seems consistent with
the main implications of the theoretical literature on catalytic finance: notably, catalytic
finance was more successful when larger amounts of money were on the table, consistent
with the view that the size of IMF programs (larger amounts and front loaded) matters for
the success of its intervention. By the same token, IMF program do not appear to have
caused debtors’ moral hazard; instead, large catalytic programs may have provided policy
makers with incentives to implement difficult and costly adjustment policies and
structural reforms. Nonetheless the issue of whether and under