Investor Responses to IMF Program Suspensions: Is Noncompliance Costly?

Objective. This article reinvestigates the ‘‘catalytic’’ effects of IMF programs on investment controlling for the implementation of the program, allowing us to ascertain if capital markets respond to the mere announcement of a Fund program or its sustained positive implementation. Methods. Using a panel of data based on the experience of 106 developing countries entering Fund programs between 1979 and 1995, I employ both probit and tobit estimations to assess the effects of the announcement of a Fund program (and performance under it) on inflows of portfolio investment. Results. I find mixed evidence that good implementation serves to slow capital flight. I find consistently strong evidence that failed Fund programs produce portfolio flight. Conclusion. The findings suggest that we should think about the Fund’s influence (both positive and negative) in light of how capital markets respond to its signals.