Signalling credibility? The IMF and catalytic finance

International Monetary Fund (IMF) programmes are thought to function as a seal of approval to international markets although evidence suggests that Fund programmes do not attract capital inflows. Existing studies fail to address the effects of selection into IMF programmes, which raises questions about the robustness of the findings. Correcting for selection bias, I find that states under Fund programmes experience significant outflows of portfolio investment, which is a ‘most likely case’ for catalytic effects. The source of this capital flight is the ‘medicine’ (the Fund programme), not the ‘disease’ (the economic downturn necessitating the IMF programme). I argue that austerity deters portfolio inflows through its effects on future returns. These findings confirm previous studies and have broader implications for both the influence of IMF programmes and the politics of economic reform. Journal of International Relations and Development (2006) 0, 000–000. doi:10.1057/palgrave.jird.1800079