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Forum: Dealing with global imbalances

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International Monetary Fund. External Relations Dept.
Published Date:
February 2006
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Alarge and growing U.S. current account deficit, with corresponding surpluses mainly in Asia and oil-producing economies, has spurred concerns that these imbalances may come undone in a disorderly fashion. Should the IMF, tasked with oversight of global financial stability and exchange rate policies, be more proactive? And, if so, how? These were some of the issues discussed at a February 2 panel organized by the American Enterprise Institute.

U.S. Treasury Undersecretary for International Affairs Tim Adams made a case for the IMF to be more assertive. In its annual consultations with its members, the Fund focuses on domestic economic developments, he said. While the choice of exchange rate regime is a country’s to make, the IMF should ask tough questions: is the exchange rate regime appropriate? Is it sustainable? And, where relevant, what is an appropriate “exit” strategy? The problem, according to Adams, is that too many countries wait until circumstances are dire before abandoning an unsustainable arrangement. This can be costly not only for the country concerned but also for other countries.

“It is time for the Fund …to reach judgments about the consistency of exchange rate policies with members’ international obligations and to do that across the membership, particularly in systemically important countries,” Adams said. Ted Truman (Institute for International Economics (IIE)) suggested that the IMF publish quantified estimates of the extent of misalignment of countries’ exchange rates and be more explicit in its policy advice, stating the extent to which a currency should appreciate or depreciate.

Destigmatizing special consultations

Adams also urged the IMF to “destigmatize” its “special consultations” with countries whose exchange rates seem out of line. The IMF has held these consultations only twice (Sweden in 1982 and Korea in 1987). Yusuke Horiguchi (Institute of International Finance) proposed simultaneous special consultations with individual countries contributing to multilateral imbalances and having the IMF draw up a coordinated remedial action plan and thereafter publicly track countries’ compliance. Along similar lines, Truman suggested special collective consultations with a group of Asian countries. Michael Mussa (IIE) ventured that the United States could start the ball rolling by requesting a special consultation for itself. To examine the U.S. current account deficit and possible exchange rate misalignment, the IMF would have to look at the issue from a global perspective and explicitly address the role of Asian exchange rates.

Shared responsibility

IMF Managing Director Rodrigo de Rato, at a speech the next day at the University of California, Berkeley, called Adams’s suggestions “interesting and constructive” and noted that efforts to strengthen IMF surveillance over exchange rates were under way. He looked forward to continuing discussions on this with all member countries in the months ahead. He also emphasized that global imbalances should be seen “as a shared responsibility by governments in systemically important countries. This will make the necessary actions both politically easier and economically more effective.” He called on the United States to increase domestic saving and on China and other Asian countries to allow more flexibility in their exchange rate regimes and to undertake broader policy reforms to boost domestic demand.

De Rato cautioned against complacency. The key challenge is to unwind global imbalances gradually, he said, and, to do this, it is important to abandon the pretense that global imbalances don’t matter or will cure themselves.

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