• DOI:10.1007/S10797-014-9329-9
• Corpus ID: 56183488

IMF conditionalities, liquidity provision, and incentives for fiscal adjustment

@article{Guimaraes2013IMFCL,
  title={IMF conditionalities, liquidity provision, and incentives for fiscal adjustment},
  author={Bernardo Guimaraes and Oz Solon Chovghi Iazdi},
  journal={International Tax and Public Finance},
  year={2013},
  volume={22},
  pages={705-722}
}

• Bernardo Guimaraes, O. Iazdi
• Published 1 October 2015
• Economics
• International Tax and Public Finance

This paper proposes a model to study how conditional lending and immediate liquidity provision affect incentives for fiscal adjustment in a country facing the risk of sovereign default. Conditional lending provides explicit incentives for fiscal adjustment but immediate liquidity provision is more effective in reducing liquidation costs. For some parameters, immediate liquidity provision induces fiscal adjustment and debt repayment, while conditional lending does not (and vice-versa). Incentives for fiscal adjustment are concave in the fraction of lending provided under conditionalities. A large cost of tight fiscal policy shifts the balance toward immediate liquidity provision.