Academic journal article The Cato Journal

Global Imbalances, Tanking Dollar, and the IMF's Surveillance over Exchange Rate Policies

Academic journal article The Cato Journal

Global Imbalances, Tanking Dollar, and the IMF's Surveillance over Exchange Rate Policies

Article excerpt

The exchange rate policies of the member countries of the International Monetary Fund could come under more intrusive scrutiny because of the June 15, 2007, decision of the IMF Executive Board on bilateral surveillance. This article highlights why the IMF decision cannot help in addressing the problem of global imbalances, even if it succeeds in delivering further appreciation of the exchange rates of surplus countries against the U.S. dollar. Moreover, there could be enormous challenges for effective implementation of the decision, which may further erode the credibility of the IMF. Even though disorderly correction of global imbalances remains a concern for every country, shifting the burden of adjustment entirely to surplus countries could have potentially damaging implications for international cooperation on global economic challenges. Past experiences of international cooperation to deal with global imbalances and currency misalignments suggest that countries rarely sacrifice their domestic economic priorities. Without appropriate macroeconomic adjustment measures, neither the high and growing U.S. current account deficit nor the savings glut of several surplus countries can be corrected solely by removing exchange rate misalignments.

The IMF's New Surveillance Decision

The IMF's new decision on bilateral surveillance over its members' exchange rate policies replaced the 30-year-old decision that was adopted in 1977 (De Rato 2007). The new decision clearly anchors the focus of bilateral surveillance of the IMF under Article IV to the goal of external stability, explains the concept of exchange rate manipulation with more clarity, and outlines the contours of the surveillance process, including the fundamental factors that could be taken into account for assessing the appropriateness of the exchange rate levels (IMF 2007). "External stability," for this purpose, would refer to balance of payments positions that are not likely to give rise to disruptive exchange rate movements. Manipulation of the exchange rate would cover actions aimed at influencing the level of the exchange rate--either to cause the exchange rate to move or to prevent the rate from moving--that could prevent effective balance of payments adjustments or lead to unfair competitive advantage for a country. The actual surveillance process for a member country under the Article IV discussions would become more intrusive, focusing on factors such as the direction and magnitude of exchange market interventions, restrictions or incentives used for influencing current account or capital account flows, monetary and financial policies used for encouraging or discouraging capital flows, external vulnerabilities, current account surpluses, government and quasi-government foreign liabilities and assets, and even the very ambiguous concept of fundamental exchange rate misalignment.

The new decision comes in the face of several important developments in the world economy. On the one hand, increasingly unsustainable global imbalances and the falling dollar suggest clearly the need for a multilateral cooperative approach to correct exchange rate misalignments, given the growing interdependence of nations under the force of globalization. On the other hand, the disappearance of borrowers from the IMF and the waning credibility of the IMF among the emerging market economies have made IMF policy advice under Article IV bilateral surveillance a mere routine zero-value exercise. Every country wants to retain absolute freedom on the choice of its exchange rate regime, and any amount of external influence or persuasion or pressure can only be responded to with stiff resistance. The atmosphere for international cooperation has also been vitiated by the general perception that it is the U.S. unilateralism that guides multilateral institutions like the IMF on issues like global imbalances and exchange rate misalignment, as is evident from one of the recent bills introduced in the U. …

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