Economic Determinants of Fund Financial Arrangements

IMF Working Papers, March 1, 1994

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Economic Determinants of Fund Financial Arrangements

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Bibliographic details

• Authors: Julio A. Santaella, Malcolm D. Knight
• Published: March 1, 1994
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451977967.001

Summary

• This paper analyses empirically the economic factors that lead to approval of Fund financial arrangements.
• It accounts for both:
  • "Demand-side" factors: the economic variables that induce a country to seek an arrangement with the Fund.
  • "Supply-side" factors: the macroeconomic policy commitments that the Fund considers when deciding whether to approve an arrangement.
• Using a pooled sample of annual observations for 91 developing countries over 1973-1991, the authors obtain maximum likelihood estimates of bivariate and univariate probit equations to determine the probability of approval of a financial arrangement for a given country in a given year.
• A number of chosen demand-side and supply-side variables are statistically significant determinants of the approval of a Fund arrangement, and the overall explanatory power of the equations is high.

Data and Methodology

• Sample: 91 developing countries
• Period: 1973-1991
• Estimation approach:
  • Maximum likelihood estimates
  • Bivariate and univariate probit equations
• Primary variables and subjects examined:
  • External debt
  • International reserves
  • Probit models
  • Real effective exchange rates
  • Real exchange rates
• Keywords: balance of payments, exchange rate, Fund arrangement, WP

Key Findings

• Demand-side and supply-side variables both play statistically significant roles in determining approval of Fund arrangements.
• The probit specifications deliver high overall explanatory power for the probability of approval.