Do geopolitical interests affect how financial markets react to IMF programs?

Abstract

We study the effect of geopolitics on short-term financial market reactions to IMF program approvals.If IMF programs are influenced by geopolitics, they may be less successful in stabilizing the economy.This could lead financial market participants to sell the country's assets and thus reduce the catalytic effect of IMF programs.Using a monthly panel data set for about 100 IMF members covering 1993-2019, we find that if geopolitics are involved, the approval of a new IMF program increases risk aversion of financial market participants.To measure geopolitical interest, we focus on program approvals for temporary members of the United Nations Security Council (UNSC).We find that temporary UNSC members receiving an IMF program face higher bond and bill yields, depreciating exchange rates, and weaker stock market developments.This is consistent with investors reducing exposure to the country's financial assets.Such a negative investor reaction is not observed for IMF program approvals for non-UNSC temporary members.

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