GOV_298_5 - The IMF Part 3: Why do governments enter into...

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The IMF Part 3: Why do governments enter into IMF programs and with what effects? Vreeland, James Raymond. 2007. The International Monetary Fund: Politics of Conditional Lending. New York: Routledge. HG3881.5.I58 V743 2007. CHAPTER 4
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The IMF Part 3: Why do governments enter into IMF programs and with what effects? Vreeland, James Raymond. 2007. The International Monetary Fund: Politics of Conditional Lending. New York: Routledge. HG3881.5.I58 V743 2007. CHAPTER 4
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Plan Reminders: Why did we ever invent an IMF? IMF resources? Who controls the IMF? Which countries have participated in IMF programs? What are the effects on economic growth? Why do governments enter into IMF programs? Interaction of international and domestic politics
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Free Capital Flow Fixed Exchange Rate Sovereign Monetary Policy Inconsistent/Unholy Trinity Or “Trilemma”: a country can only have 2 out of 3 of these
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1944 Degree of global capital mobility 1971-3 Fixed exchange rates + Capital controls Floating exchange rates + Open capital flows 1870 Interwar period Fixed exchange rates + Open capital flows Growing #’s of democracies Few democracies Under “autocracy,” governments could maintain fixed exchange rates with high capital mobility. Under democracy, they could not.
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What is the IMF? Like an international “credit union” Almost all the countries in the world are members (187) All hold currency on reserve The IMF can use these reserves to loan to countries in “crisis” Moral Hazard? Conditionality! IMF programs = loans + conditions Decisions at the IMF are by majority rule Influence over decisions pegged to “economic size” (but it’s also political)
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Which countries have entered IMF programs? Figure 1.1: Percentage of countries participating in IMF programs 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 Year Percent Western Europe, US and Japan Rest of the world
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Why did the West stop using the IMF? Bretton Woods fixed XR system constraining IMF loan: Softens the blow of adjustment Conditionality: Still enforces adjustment Impinges on NATIONAL SOVEREIGNTY Eventually, the West abandoned fixed exchange rates! http://www.youtube.com/watch?v=iRzr1QU6K1o
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What is an IMF program? Why would you want to avoid it?
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La loi LETTER OF INTENT Drafted (by whom?)… signed by finance minister, central bank president, and/or chief executive. Sent to the Executive Board for approval 1 st “tranche” of loan released.
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Fiscal austerity cutting government services and increasing taxes Tight monetary policy raising interest rates and reducing credit creation Sometimes: Currency devaluation What are the goals of IMF programs? Economic stability.
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GOV_298_5 - The IMF Part 3: Why do governments enter into...

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