International Finance Theory and Policy
by Steven M. Suranovic

Finance 100-2

The Role of the International Monetary Fund (IMF)

This is an outline of a few important issues to discuss in a lesson about the IMF. A more complete account will follow in the future.

  • The IMF was created in the 1940s to help maintain the viability of the fixed exchange rate (or Bretton-Woods) system. Its main task was to provide a source of funds to countries that suffered from temporary balance of payments problems. After 1973, when the Bretton-Woods fixed exchange rate system collapsed, the IMF redefined its role, becoming a source of funds to countries suffering from international debt problems.
  • The funds provided to countries by the IMF are in the form of loans. These loans typically have conditions, i.e., requirements for policy changes, attached to them. The appropriateness of IMF conditionality has long been a contentious issue.
  • One positive role for conditionality worth emphasizing is that it provides countries a scapegoat for possibly necessary policy changes that would be difficult to implement otherwise. For example, if the IMF loans a country, say, $10 billion but requires the country to reduce its government budget deficit by some percentage in order to receive the money, then the country implementing painful budget changes can blame the IMF for being cruel and thereby shift the blame away from itself.
  • One negative aspect of conditionality, emphasized by Stiglitz and others, has been heavy reliance on a one-size-fits-all solution (i.e., the Washington Consensus) and a disregard for unique social problems faced by particular countries.
  • Finally, one should emphasize the issue of moral hazard vis-a-vis IMF bailouts. If international investors and banks recognize that foreign loans to national governments will automatically be covered by IMF bailouts, they are likely to make riskier loans. Why worry about making a risky loan to an unstable develping country if you know you'll get your money back no matter what!


For more information about the IMF go HERE to the Wikipedia page.

International Finance Theory and Policy - Chapter 100-2: Last Updated on 3/8/07