The IMF’s bailout is intended to help countries that have financial problems. It is designed to tackle these problems by reducing investor fear of default, strengthening financial systems, and restoring market confidence. However, many of these programs fail to meet their goals.
One reason for their failure is that the IMF’s conditionality may not be effectively enforced. Stone (2004) and Kilby (2009) argue that the IMF is unlikely to punish countries that do not comply with its conditions if they are political allies of major member states. Moreover, the effectiveness of the IMF’s strategy may be compromised by its limited resources.
It is important to note that the IMF cannot provide loans to East Asian governments unless it gets billions more in funding from the US government and other members. Therefore, Congress should reject the Administration’s request to increase IMF funding.
There is growing interest in analyzing the effectiveness of IMF bailouts. Researchers have used a variety of research designs and methodologies to test the IMF’s effectiveness in providing financial aid to debtor countries. Some studies employ a control country approach in order to isolate the effects of IMF intervention. However, controlling for market conditions and country economic fundamentals is difficult since these factors are endogenous and vary across time. Moreover, these variables are influenced by both the decision of debtors and investors to invest in a particular country. This creates a confound in empirical studies. Consequently, a substantial amount of empirical work on IMF bailouts produces conflicting results.
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