Sovereign external borrowing and multilateral lending in crises

Multilateral development banks (MDBs) are key players in the International Financial Architecture and an important source of external finance for governments. Beyond their impact to foster development in recipient countries, understanding the behavior of MDB flows is important to assess their contribution to macroeconomic stability. This paper studies the co-movement of sovereign lending from MDBs with private sovereign lending and their dynamics during fiscal crises. The paper finds that unlike private lending, multilateral sovereign lending does not retrench in most fiscal crises. It also finds synchronization between multilateral development banks and the International Monetary Fund during fiscal crises, particularly in some regions. Event analyses show that this synchronization persists after several periods. Taken together, our results strongly support the notion that MDBs play an important role in crisis mitigation and suggest that this role neither erodes the discipline between International Financial Institutions within the International Financial Architecture, nor it creates incentives towards fiscal mismanagement in recipient countries.

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