Influence by omission: The IMF’s lending capacity and central bank design

Garriga, Ana Carolina and Gavin, Michael A. (2025): Influence by omission: The IMF’s lending capacity and central bank design.

Abstract

A large literature explores how loan conditionalities and policy recommendations embedded in International Monetary Fund lending programs influence country behavior and policy choices. We argue that the IMF’s influence extends beyond these intentional efforts. This paper shows that the growth in the IMF’s lending capacity has failed to keep pace with financial globalization, and that this has incentivized emerging and developing economies to strengthen their domestic institutions for financial stability, particularly, their central bank’s capabilities to act as a lender of last resort. We conceptualize this as influence by omission, whereby the IMF shapes behavior not through direct engagement but through its declining ability to serve as an effective financial backstop. Using original data coding central bank lender of last resort powers for 60 developing countries between 1994 and 2020, we find that countries with relatively limited access to IMF resources are significantly more likely to strengthen their central banks’ lender of last resort authority. This finding is robust across a range of model specifications, instrumental variable analyses, and dynamic estimations. An event study of countries’ response to the Covid shock reveals that countries with stronger lending of last resort capabilities were much more likely to manage the crisis without drawing on IMF resources. Importantly, this effect is specific to lender of last resort powers and does not extend to other aspects of central bank governance such as independence or transparency, suggesting that distinct international and domestic incentives shape different reform trajectories.

• Item Type: MPRA Paper
• Language: English
• Keywords: Central Banks, Domestic Reforms, Financial Stability, International Monetary Fund, Lender of Last Resort
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F55 - International Institutional Arrangements; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; H - Public Economics > H1 - Structure and Scope of Government > H12 - Crisis Management; H - Public Economics > H8 - Miscellaneous Issues > H81 - Governmental Loans ; Loan Guarantees ; Credits ; Grants ; Bailouts

References

Alves, Nuno, Diana Bonfim, and Carla Soares. 2021. “Surviving the Perfect Storm: The Role of the Lender of Last Resort.” Journal of Financial Intermediation 47: 100918. doi:10.1016/j.jfi.2021.100918.

Bagehot, Walter. 1873. Lombard Street: A Description of the Money Market. HS King&Company.

Bailey, Michael, Anton Strezhnev, and Erik Voeten. 2017. “Estimating Dynamic State Preferences from United Nations Voting Data.” Journal of Conflict Resolution 61(2): 430–56.

Ballard-Rosa, Cameron, Layna Mosley, and Rachel L Wellhausen. 2021. “Contingent Advantage? Sovereign Borrowing, Democratic Institutions and Global Capital Cycles.” British Journal of Political Science 51(1): 353–73. doi:10.1017/S0007123418000455.

Bartik, Timothy J. 1991. “Who Benefits from State and Local Economic Development Policies?” Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Beck, Nathaniel, and Jonathan N Katz. 1995. “What to Do (and Not to Do) with Time-Series Cross-Section Data.” American Political Science Review 89(3): 634–47.

Bodea, Cristina, and Raymond Hicks. 2015. “Price Stability and Central Bank Independence: Discipline, Credibility, and Democratic Institutions.” International Organization 69(01): 35–61. doi:doi:10.1017/S0020818314000277.

Boockmann, Bernhard, and Axel Dreher. 2003. “The Contribution of the IMF and the World Bank to Economic Freedom.” European Journal of Political Economy 19(3): 633–49.

Broos, Menno, Sonsoles Gallego Herrero, Isabel Garrido, Fernando López Vicente, Mayukh Mukhopadhyay, Claudia Maurini, and Benjamin Vonessen. 2018. “A Quantitative Analysis of the Size of IMF Resources.” ECB Occasional Paper (213).

Bunte, Jonas B. 2019. Raise the Debt: How Developing Countries Choose Their Creditors. Oxford University Press.

Calomiris, Charles W., Marc Flandreau, and Luc Laeven. 2016. “Political Foundations of the Lender of Last Resort: A Global Historical Narrative.” Rules for the Lender of Last Resort 28: 48–65. doi:10.1016/j.jfi.2016.09.002.

Cantú, Carlos, Paolo Cavallino, Fiorella De Fiore, and James Yetman. 2021. 934 A Global Database on Central Banks’ Monetary Responses to Covid-19. Bank for International Settlements, Monetary and Economic Department.

Chapman, Terrence, Songying Fang, Xin Li, and Randall W. Stone. 2017. “Mixed Signals: IMF Lending and Capital Markets.” British Journal of Political Science 47(2): 329–49. doi:10.1017/S0007123415000216.

Clark, Richard. 2022. “Bargain Down or Shop Around? Outside Options and IMF Conditionality.” The Journal of Politics 84(3): 1791–1805. doi:10.1086/719269.

Copelovitch, Mark S. 2010. “Master or Servant? Common Agency and the Political Economy of IMF Lending.” International Studies Quarterly 54(1): 49–77. doi:10.1111/j.1468-2478.2009.00577.x.

Coppedge, Michael, John Gerring, Carl Henrik Knutsen, Staffan I. Lindberg, Jan Teorell, Nazifa Alizada, David Altman, et al. 2021. “V-Dem Country-Year/Country-Date Dataset V11.” https://www.v-dem.net/en/data/data-version-11/.

Cukierman, Alex. 1992. Central Bank Strategy, Credibility and Independence: Theory and Evidence. Cambridge, MA: The MIT Press.

Denbee, Edward, Carsten Jung, and Francesco Paternò. 2016. “Stitching Together the Global Financial Safety Net.” Bank of England Financial Stability Paper No. 36.

Detraz, Nicole, and Dursun Peksen. 2016. “The Effect of IMF Programs on Women’s Economic and Political Rights.” International Interactions 42(1): 81–105. doi:10.1080/03050629.2015.1056343.

Dincer, N. Nergiz, and Barry Eichengreen. 2014. “Central Bank Transparency and Independence: Updates and New Measures.” International Journal of Central Banking 10(1): 189–253.

Drechsler, Itamar, Thomas Drechsler, David Marques-Ibanez, and Philipp Schnabl. 2016. “Who Borrows from the Lender of Last Resort?” The Journal of Finance 71(5): 1933–74. doi:10.1111/jofi.12421.

Dreher, Axel, and Nathan M Jensen. 2007. “Independent Actor or Agent? An Empirical Analysis of the Impact of US Interests on International Monetary Fund Conditions.” The Journal of Law and Economics 50(1): 105–24.

Dreher, Axel, Valentin Lang, B Peter Rosendorff, and James Raymond Vreeland. 2022. “Bilateral or Multilateral? International Financial Flows and the Dirty-Work Hypothesis.” The Journal of Politics 84(4): 1932–46.

Dreher, Axel, Jan-Egbert Sturm, and James Raymond Vreeland. 2009. “Global Horse Trading: IMF Loans for Votes in the United Nations Security Council.” European Economic Review 53(7): 742–57.

Eggers, Andrew C., Guadalupe Tuñón, and Allan Dafoe. 2024. “Placebo Tests for Causal Inference.” American Journal of Political Science 68(3): 1106–21. doi:10.1111/ajps.12818.

Elkins, Zachary, and Beth A. Simmons. 2005. “On Waves, Clusters, and Diffusion: A Conceptual Framework.” Annals of the American Academy of Political and Social Science 598(1, The Rise of Regulatory Capitalism: The Global Diffusion of a New Order).

Fernández-Arias, Eduardo, and Eduardo Levy-Yeyati. 2012. “Global Financial Safety Nets: Where Do We Go from Here?” International Finance 15(1): 37–68. doi:10.1111/j.1468-2362.2012.01295.x.

Fischer, Stanley. 1999. “On the Need for an International Lender of Last Resort.” Journal of Economic Perspectives 13(4): 85–104.

Garriga, Ana Carolina. 2025. “Revisiting Central Bank Independence in the World: An Extended Dataset.” International Studies Quarterly 69(2): sqaf024. doi:https://doi.org/10.1093/isq/sqaf024.

Garriga, Ana Carolina, and Cesar M. Rodriguez. 2023. “Central Bank Independence and Inflation Volatility in Developing Countries.” Economic Analysis and Policy 78: 1320–41.

Gavin, Michael. 2020. “Independent Central Banks and Banking Crisis Liquidity.” The Review of International Organizations 15(1): 109–31. doi:10.1007/s11558-018-9324-5.

Goes, Iasmin. 2022. “Examining the Effect of IMF Conditionality on Natural Resource Policy.” Economics & Politics n/a(n/a). doi:10.1111/ecpo.12214.

Goodhart, Charles. 1988. The Evolution of Central Banks. MIT press.

Gray, Julia. 2013. The Company States Keep. International Economic Organizations and Investor Perceptions. Cambridge, MA: Cambridge University Press.

Henisz, Witold Jerzy. 2002. “The Institutional Environment for Infrastructure Investment.” Industrial and Corporate Change 11(2): 355–89.

International Monetary Fund. 1974. Summary Proceedings of the Fifth Annual Meetings of the Board of Governors. Washington, D.C.: IMF.

International Monetary Fund. 1988. Summary Proceedings of the Forty-Third Annual Meeting of the Board of Governors. Washington, D.C.: IMF.

International Monetary Fund. 1989. Summary Proceedings of the Forty-Fourth Annual Meeting of the Board of Governors. Washington, D.C.: IMF.

International Monetary Fund. 1999. “Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of Principles.” Washington, DC.

Johnson, Simon, and James Kwak. 2011. 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York, NY: Vintage Books.

Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95(1): 161–82. doi:10.1257/0002828053828518.

Jordana, Jacint, and Guillermo Rosas. 2019. “Central Banks and Banking Regulation: Historical Legacies and Institutional Challenges.” In The Blind Spots of Public Bureaucracy and the Politics of Non‐Coordination, eds. Tobias Bach and Kai Wegrich. Cham: Springer International Publishing, 195–216. doi:10.1007/978-3-319-76672-0_10.

Kaplan, Stephen B., and Sujeong Shim. 2024. “Global Contagion Risk and IMF Credit Cycles: Emergency Exits and Revolving Doors.” Regulation & Governance 18(3): 851–73. doi:10.1111/rego.12562.

Kern, Andreas, Bernard Reinsberg, and Matthias Rau-Göhring. 2019. “IMF Conditionality and Central Bank Independence.” European Journal of Political Economy 59: 212–29. doi:10.1016/j.ejpoleco.2019.03.002.

Kern, Andreas, Bernhard Reinsberg, and Patrick E. Shea. 2024. “Why Cronies Don’t Cry? IMF Programs, Chinese Lending, and Leader Survival.” Public Choice 198(3): 269–95. doi:10.1007/s11127-023-01114-4.

Laeven, Luc, and Fabian Valencia. 2018. “Systemic Banking Crises Revisited.” IMF working paper No. 18/206.

Lane, Philip R., and Gian Maria Milesi-Ferretti. 2007. “The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004.” Journal of International Economics 73(2): 223–50. doi:10.1016/j.jinteco.2007.02.003.

Lane, Timothy. 1999. “The Asian Financial Crisis: What Have We Learned?” Finance and Development 36(3): 44.

Lang, Valentin. 2021. “The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality.” The Review of International Organizations 16(3): 599–623.

Lenz, Gabriel S, and Alexander Sahn. 2021. “Achieving Statistical Significance with Control Variables and without Transparency.” Political Analysis 29(3): 356–69.

Lipscy, Phillip Y., and Haillie Na-Kyung Lee. 2019. “The IMF As a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises.” International Organization 73(1): 35–64. doi:10.1017/S0020818318000371.

Maxfield, Sylvia. 1997. Gatekeepers of Growth: The International Political Economy of Central Banking in Developing Countries. Princeton, NJ: Princeton University Press.

McNamara, Kathleen. 1998. The Currency of Ideas: Monetary Politics in the European Union. Ithaca, NY: Cornell University Press.

Moretti, Marina, Marc Dobler, and Alvaro Piris Chavarri. 2020. Managing Systemic Banking Crises: New Lessons and Lessons Relearned. International Monetary Fund.

Mosley, Layna, and B Peter Rosendorff. 2023. “Government Choices of Debt Instruments.” International Studies Quarterly 67(2): sqad030. doi:10.1093/isq/sqad030.

Nelson, Stephen C, and Christopher P Dinkel. 2024. “IMF Lending Programs and Repression in Autocracies.” International Studies Quarterly 68(4): sqae149. doi:10.1093/isq/sqae149.

Nelson, Stephen C, and Geoffrey PR Wallace. 2017. “Are IMF Lending Programs Good or Bad for Democracy?” The Review of International Organizations 12(4): 523–58.

Presbitero, Andrea F., and Alberto Zazzaro. 2012. “IMF Lending in Times of Crisis: Political Influences and Crisis Prevention.” World Development 40(10): 1944–69. doi:10.1016/j.worlddev.2012.04.009.

Quintyn, Mr Marc, and Mr David S. Hoelscher. 2003. Managing Systemic Banking Crises. International Monetary Fund.

Reinsberg, Bernhard, Andreas Kern, and Matthias Rau-Göhring. 2021. “The Political Economy of IMF Conditionality and Central Bank Independence.” European Journal of Political Economy 68: 101987. doi:10.1016/j.ejpoleco.2020.101987.

Reinsberg, Bernhard, Thomas Stubbs, and Alexander Kentikelenis. 2022a. “Compliance, Defiance, and the Dependency Trap: International Monetary Fund Program Interruptions and Their Impact on Capital Markets.” Regulation & Governance 16(4): 1022–41. doi:10.1111/rego.12422.

Reinsberg, Bernhard, Thomas Stubbs, and Alexander Kentikelenis. 2022b. “Unimplementable by Design? Understanding (Non-)Compliance with International Monetary Fund Policy Conditionality.” Governance 35(3): 689–715. doi:10.1111/gove.12605.

Rosas, Guillermo. 2006. “Bagehot or Bailout? An Analysis of Government Responses to Banking Crises.” American Journal of Political Science 50(1): 175–91.

Sahasrabuddhe, Aditi. 2024. “Central Bankers in Crisis: Interpersonal Trust, Cooperation, and the Creation of the Fed Swap Network during the 2008 Global Financial Crisis.” International Studies Quarterly 68(2): sqae030. doi:10.1093/isq/sqae030.

Sau, Lino. 2004. “The Financial Fragility of the Emerging Countries and the Role of International Lender of Last Resort.” International Journal of Political Economy 34(3): 3–19.

Scheubel, Beatrice, and Livio Stracca. 2016. “What Do We Know about the Global Financial Safety Net? Rationale, Data, and Possible Evolution.” Occasional Paper Series No. 177.

Scheubel, Beatrice, and Livio Stracca. 2019. “What Do We Know about the Global Financial Safety Net? A New Comprehensive Data Set.” Journal of International Money and Finance 99: 102058. doi:10.1016/j.jimonfin.2019.06.003.

Shim, Sujeong. 2022. “Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending.” Comparative Political Studies 55(13): 2147–77. doi:10.1177/00104140211060280.

Simmons, Beth A. 2000. “International Law and State Behavior: Commitment and Compliance in International Monetary Affairs.” American Political Science Review 94(4): 819–35.

Solingen, Etel. 2012. “Of Dominoes and Firewalls: The Domestic, Regional, and Global Politics of International Diffusion.” International Studies Quarterly 56(4): 631–44. doi:10.1111/isqu.12034.

Solow, Robert M. 1982. “On the Lender of Last Resort.” In Financial Crises: Theory, History and Policy, eds. Charles P. Kindleberger and Jean-Pierre Laffarge. Cambridge: Cambridge University Press, 237–47.

Steinwand, Martin C., and Randall W. Stone. 2008. “The International Monetary Fund: A Review of the Recent Evidence.” The Review of International Organizations 3(2): 123–49. doi:10.1007/s11558-007-9026-x.

Stubbs, Thomas, William Kring, Christina Laskaridis, Alexander Kentikelenis, and Kevin Gallagher. 2021. “Whatever It Takes? The Global Financial Safety Net, Covid-19, and Developing Countries.” World Development 137: 105171.

United Nations. 2021. “UN Comtrade Databse.” http://comtrade.un.org.

U.S. General Accounting Office. 1988. International Monetary Fund: Observations on Its Financial Condition. Washington, D.C.: U.S. General Accounting Office. Testimony before the Joint Economic Committee, July 23, 1998.

Walter, Stefanie. 2013. Financial Crises and the Politics of Macroeconomic Adjustments. Cambridge University Press.

Wursten, Jesse. 2018. “Testing for Serial Correlation in Fixed-Effects Panel Models.” The Stata Journal 18(1): 76–100. doi:10.1177/1536867X1801800106.