An Identity Crisis? Examining IMF Financial Programming

The IMF uses its well-known "financial programming" model to derive monetary and fiscal programs to achieve desired macroeconomic targets in countries undergoing crises or receiving debt relief. Financial programming is based on monetary, balance of payments, and fiscal accounting identities. This paper considers under what conditions financial programming would work best, and then tests those conditions in the data. All of the identities contain large statistical discrepancies, which weakens the case for them as a "consistency check." In at least the literal applications of the framework, financial programming does not do well in forecasting or explaining the target variables, even when some components of the identity are known with certainty. These results suggest that IMF staff have to rely on macroeconomic theory and empirics that come from outside the financial programming framework is designing stabilization packages