IMF Currency Shift Aims to Shield Global Econ

On Monday, the International Monetary Fund announced the first update of its foreign-exchange surveillance mechanism in three decades. Aside from some media coverage, which was generally descriptive in nature, there was little fanfare. Yet there seem to be some potentially far-reaching implications that have yet to be grasped.

Previously, the IMF had three principles about currency regimes. First, countries should not manipulate the foreign-exchange market to prevent balance-of-payment adjustments, giving an unfair competitive advantage. Second, intervention can be undertaken if markets are disorderly. And third, when countries do intervene, they should take into account the impact on the currency they are intervening against.

To these, the IMF has added a fourth principle: Members should avoid exchange-rate policies that result in external instability. This is not inconsequential. Rather than simply another principle, the IMF is placing it at the center of its surveillance efforts.

It is a long time coming. The U.S. has been pushing in this direction for the last couple of years and, perhaps less formally, since the end of the Asian financial crisis that is about to celebrate its 10th anniversary.

Two Extraordinary Effects

It turns orthodoxy on its head in two important respects. First, traditionally, the burden of the adjustment has fallen on the deficit, or weaker, country. At Bretton Woods, Keynes argued that the surplus country should also have a responsibility, but the U.S., the main surplus country at the time, insisted on the traditional approach.

It wasn't until after Bretton Woods collapsed and Europe was seeking to avoid dramatic exchange-rate movements between its members that surplus countries, such as Germany, had a responsibility to defend currency bands, such as against Italy.

This new principle clearly shifts the burden away from the U.S. and deficit countries to surplus countries, especially China, and, to some extent, Japan and the oil exporters.

« Previous Page

1 2 3

Next Page »