Does the World Bank cause moral hazard and political business cycles? Evidence from panel data

Using panel data, this paper tries to explain the amount of loans granted by the IBRD and it analyzes their effect on monetary and fiscal policies in the recipient countries. To check for political business cycles, the influence of elections on IBRD loans is examined. The results obtained support the hypothesis that net flows are higher prior to elections. With respect to moral hazard it is shown that a country's rate of monetary expansion and its government budget deficit is higher the more loans it has received from the IBRD. Moreover, the budget deficit is shown to be larger the higher the interest rate subsidy offered by the Bank. The paper concludes with proposals for reform.