IMF Conditionality as a Screening Device

• Published in: The Economic journal (London) Vol. 109; no. 454; pp. 111 - 125
• Main Authors: Marchesi, Silvia, Thomas, Jonathan P.
• Format: Journal Article
• Language: English
• Published: Oxford, UK and Boston, USA Blackwell Publishers Ltd 01-03-1999; Blackwell Publishers; Oxford University Press
• Subjects: Bank earnings; Bank loans; Banks; Creditors; Debt; Debt cancellation; Debt reduction; Debt relief; Debt repayment; Debt service; Development banks; Economic models; Economic theory; Financial investments; International financial institutions; International lending; Investment banking; Loans; Studies
• ISSN: 0013-0133; 1468-0297
• DOI: 10.1111/1468-0297.00420

A theoretical model is developed in which both buybacks and the adoption of an IMF programme can be used as screening devices which enable a creditor to discriminate between debtor countries which are willing to use debt relief in order to invest and repay and countries which are not. Asymmetric information is assumed. This problem can be solved if the country has sufficient resources to engage in a debt buyback and so gain the debt relief. When the country is credit constrained, an alternative screening mechanism is to undertake an IMF programme in return for debt reduction and possibly an IMF loan.