The IMF and precautionary lending: An evaluation of the selectivity and effectiveness of the Flexible Credit Line

Date: 6 October 2016

Venue: UAntwerpen, Stadscampus, IOB, Nile Room - Lange SInt-Annastraat 7 - 2000 ANTWERP (route: UAntwerpen, Stadscampus)

Time: 12:30 PM - 2:00 PM

Organization / co-organization: IOB

Short description: Dr Dennis Essers presenting jointwork with Stefaan Ide (National Bank of Belgium)


In response to the global financial crisis and to enhance its role as international lender of last resort, the IMF has extended its lending toolkit with new precautionary instruments, most notably the Flexible Credit Line (FCL). The FCL makes available large amounts of resources to member countries with strong macroeconomic fundamentals and solid policy track records. Importantly, countries that satisfy ex ante the FCL’s strict qualification criteria can draw upon these resources at their own discretion and without the typical ex post adjustment programme. Despite its seemingly attractive features, so far only three countries, Mexico, Colombia and Poland, have entered into FCL arrangements. Furthermore, the actual impacts of the FCL remain understudied.

In this presentation I first try to shed light on why exactly, among a larger group of emerging market economies, Mexico, Colombia and Poland have entered into FCL arrangements. More specifically, I investigate which macroeconomic, financial and political variables correlate with FCL entry by means of simple descriptives and parsimonious probit regressions. Second, I look into the effects of the FCL on external bond spreads and gross capital inflows into Mexico, Colombia and Poland. I adopt a counterfactual approach based on the so-called ‘synthetic control’ methodology developed by Alberto Abadie and others. In short, I estimate the impacts of the FCL as the difference between actual post-intervention spreads/capital flows in an FCL country and the same outcomes for a synthetic control group. The latter is constructed as a weighted combination of non-FCL countries selected out of a larger ‘donor pool’ of emerging markets. Country weights are chosen so that the characteristics of the synthetic control over a pre-intervention period match as closely as possible those of the FCL country under study.

Note: Beyond the topic of the presentation, the synthetic control method itself may be of interest to IOB researchers and students involved in the quantitative evaluation of development interventions or comparative case studies. This methodology does not require large samples of treated and untreated units (unlike propensity score matching, for example) and allows the effects of confounding, unobserved variables to vary over time (unlike regular difference-in-differences designs).

Entrance fee: Free - bring your own lunch


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