What Role Does the Imf Play in the World Economy? What Are the Main Costs and Benefits of Imf Adjustment Policies?

Topics: International Monetary Fund, Bretton Woods system, World Bank Pages: 6 (2131 words) Published: October 4, 2008
The International Monetary Fund (IMF) is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good (IMF 2006). That’s IMF is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance. The primary purpose of IMF is to ensure the stability of the international monetary system in order to sustainable economic growth and rising living standards of the member countries. And IMF also granting short-term loans and promotes free-trade to conserve foreign exchange reserves. Major industrial nations fall suddenly in the Great Depression of 1930s. All countries gain from trade without restrictions. According to this theory of free trade, the market of all industries was enhanced. The distributional concerns are taken in to account. Some of the industries lose out even as others benefit in any given country. (IMF2006) “The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation.” (IMF 2006) In this meeting, a charter of an international institution was drafted to oversee the international monetary system and to promote both the elimination of exchange restrictions relating to trade in goods and services, and the stability of exchange rates. The IMP played a critical role to stabilize the exchange rate, prevent crisis, and resolution of crisis. The countries who joined to the IMP agreed to keep their exchange rates pegged at rates that could be adjusted only to correct a “fundamental disequilibrium” in the balance of payments and only with the IMF’s agreement. The exchange rates pegged at rate means that the value of countries’ currencies in terms of the U.S. dollar and, in the case of the United States, the value of the U.S. dollar in terms of gold. This is called Bretton Woods system. That system prevailed until 1971, when the US government suspended the convertibility of the US dollar into gold. After that, the economy shifted to the floating rate regime. IMF member have been free to choose any form of exchange arrangement they wish, except pegging their currency to gold. It allowed the currency to float freely, pegged it to another currency or a basket of currencies, adopted the currency of another country, or participated in a currency bloc. Now-a-day, the IMF played most attention in exchange rate surveillance. It assesses how countries’ policies fare in light of the commitments they undertake as members of the IMF. Especially, the IMF assesses the impact of countries' exchange rate and other policies on their external stability. And then, assesses on the stability of the international system of exchange rate. The goal of exchange rate surveillance is to support policies that good for the member but also good for other counties through a process of collaboration. It is because one country’s policies can have powerful ripple effects on other countries. After the Mexican crisis in 1994-1995 and the Asian crisis in 1997-1998, the IMF played more efforts to help the countries prevent financial crises. IMF advising its members to incorporate more “shock absorbers” into their policies, such as adequate reserve levels, efficient, and diversified financial systems, more effective social safety nets, and a fiscal policy that leaves room for higher deficits in difficult times. Also, the IMF has introduced several specific initiatives in order to make the countries less vulnerable to crises. The first initiative is IMF collaborating with World Bank. The IMF conducts in-depth assessment of countries’ financial sectors under the Financial Sector Assessment Program (FSAP). The aims of FSAP is increasing the effectiveness of...
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