This dissertation examines the relationship between a country’s involvement in an International Monetary Fund (IMF) facility and that country’s ability to catalyze capital inflows. The IMF and policymakers tend to “take for granted” the catalytic effect of IMF lending (e.g. Schadler et al 1995; Bird and Rowlands 1997). However, with few exceptions, the empirical literature finds that Fund arrangements do not increase a participating country’s access to private capital, and in fact more likely diminish the country’s access to private capital. Why does there exist variation in the catalytic effect of Fund lending? This dissertation argues that the effect of IMF agreements on a country’s access to private capital is dependent on whether or not investors believe the participatory country will implement the reforms tied to the IMF loan. International, facility, and domestic-level factors influence investor’s expectations of implementation, thus influencing whether or not they will invest in the participatory country.

The theory is empirically tested using a Treatment Effects Model with a Markov Transition in the treatment equation in a dataset covering 142 countries between 1977 and 2008. Countries which sign IMF agreements experience an increase in portfolio investment, regardless of international, domestic and facility-level factors. However, countries which sign IMF agreements experience different levels of foreign direct investment (FDI) inflows, depending on, 1) whether they are of geopolitical strategic importance to powerful members of the IMF, 2) if they have signed a concessional loan, 3) the level of executive autonomy. The results supported the theory that investors do not view all IMF program equally and respond positively to those types of programs where implementation is more likely.