The IMF, Domestic Public Sector Banks, and Currency Crises in Developing States

Bumba Mukherjee, Benjamin E. Bagozzi

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

The stabilization programs of the International Monetary Fund (IMF)-which are often designed to prevent currency crashes and promote exchange rate stability-frequently fail to prevent currency crises in program-recipient developing countries. This leads to the following puzzle: when do IMF programs fail to prevent currency crises in developing states that turn to the Fund for assistance? We suggest that the likelihood that a currency crisis may occur under an IMF program depends on the market concentration of public sector banks in program-participating developing countries: the higher the market concentration of public banks in a program recipient nation, the more likely that the IMF program will be associated with a currency crisis. Specifically, if the market concentration of public banks in a program-participating developing country is high, then banks will compel the government to renege on its commitment to implement banking sector reforms. This induces a financial panic among investors that leads to a currency crisis. Statistical tests from a sample of developing countries provide robust support for our hypothesis.

Original languageEnglish (US)
Pages (from-to)1-29
Number of pages29
JournalInternational Interactions
Volume39
Issue number1
DOIs
StatePublished - Feb 26 2013

Keywords

  • International Monetary Fund
  • currency crises
  • developing countries

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