Not so Bad After All? The Effect of IMF Conditions on Investor Perceptions

Abstract

This thesis focuses on the role of IMF conditions in resurrecting investor sentiments following a severe economic crisis. Much of the existing empirical literature on the subject of IMF programs and investment find no effect, or even a negative effect of such arrangements. This thesis argues that IMF programs do not automatically improve investor sentiments for a crisis-ridden country. I argue that what matters for investors is the credible commitment of countries to undertake reform. Crisis-ridden countries can signal this commitment by incurring the political costs associated with accepting a large amount of IMF conditions. Using panel data for 166 countries over a 22 year period, from 1992-2013, I find that contrary to what much of the previous literature predicts, there is a positive effect of prior action and performance criteria conditions on Institutional Investor rating following a severe economic crisis.