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No. 791: IMF Programs and Sensitivity to External Shocks: An Empirical Application

Mirela Sorina Miescu , Queen Mary University of London

April 5, 2016

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Abstract

This paper assesses that participation of countries in IMF programs significantly diminishes their vulnerability to external shocks. Currently, one of the primary purposes of the IMF is to ensure global stability. As such, the Fund has the responsibility of advising member countries on the financial and economic policies that promote stability, helping to avoid crises and smoothing the adjustment to exogenous shocks. We employ a Bayesian Vector Autore gressive model to obtain a measure for the exposure of countries to external shocks. We then use an Instrumental Variable approach and we show that participation in the IMF arrangements has a significant impact in decreasing the sensitivity to exogenous shocks. Despite the criticism concerning the effects of the IMF loans on the economy of the recipient country, our results provide clear evidence that the Fund is efficient in helping member countries to build a strong economic resilience. These results are of considerable in terest since shocks and crises are a systematic feature of the global economy which affects both developing and developed countries.

J.E.L classification codes: F33, C11, C13, C3, E3

Keywords:Bayesian VAR, IMF, Spillovers

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