- International Monetary Fund. Independent Evaluation Office
- Published Date:
- August 2007
© 2007 International Monetary Fund
Production: IMF Multimedia Services Division
Cover: Massoud Etemadi
Typesetting: Alicia Etchebarne-Bourdin
Figures: Bob Lunsford and Matthew Mariani
IMF exchange rate policy advice / [Prepared by an IEO team led by Shinji Takagi and John Hicklin]—[Washington, D.C.]: International Monetary Fund, 2007.
Includes bibliographical references.
1. International Monetary Fund—Evaluation. 2. Foreign exchange rates. I. Takagi, Shinji, 1953–II. Hicklin, John, 1953–III. International Monetary Fund. Independent Evaluation Office.
HG3881.5.I58 I444 2007
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- 1 Introduction and Context
- 2 Is the IMF’s Role in Exchange Rate Policy Well Defined and Understood?
- 3 What Has Been the Quality of IMF Analysis and Advice?
- 4 The IMF’s Policy Dialogue and the Impact of Its Advice
- 5 Findings and Recommendations
- Background Documents
- 1. Principles and Procedures of IMF Exchange Rate Surveillance
- 2. Executive Board Guidance on Exchange Rate Surveillance, 1999–2005
- 3. The Equilibrium Exchange Rate: Alternative Concepts and Their Applications in IMF Surveillance
- 4. Characteristics of IMF Exchange Rate Surveillance: A Full Review of Country Documents
- 5. A Review of IMF Exchange Rate Surveillance in 30 Economies, 1999–2005
- 6. IEO Survey of the Authorities and Staff
- 7. Assessing the Effectiveness and Impact of IMF Exchange Rate Surveillance
- 8. List of Interviewees
- 1.1. The Global Context
- 2.1 Challenges and Tensions in the Roles of the IMF and of Member Countries
- 3.1 IMF Surveillance of Intervention Policies
- 3.2 Views on Reserves Accumulation, 2000–05: Selected Cases
- 3.3 Data Issues in IMF Exchange Rate Surveillance
- 3.4 The Treatment of Global Imbalances in Bilateral Consultations, 2003–05
- 4.1 Currency Interventions of June 1998 and September 2000
- 4.2 IMF Involvement in Selected Episodes of Exchange Rate Policy Coordination
- 1.1. Major Currencies, by Real GDP and Currency Regime, 1975–2005
- 2.1 Authorities’ Views on Different Roles the IMF Has Played in the Area of Exchange Rate Policy
- 2.2 Staff’s Views on Different Roles the IMF Has Played in the Area of Exchange Rate Policy
- 2.3 Views on Selected Roles of the IMF, by Country Group
- 2.4 Contribution Made by the IMF to Major Exchange Rate Policy Decisions Taken by Authorities
- 3.1 Perceived Change in the Overall Quality of IMF Staff’s Exchange Rate Analysis and Assessment
- 3.2 Survey of Authorities: Relative Emphasis Given by the Authorities and Staff, by Policy Issue
- 3.3 Survey of Authorities: Views on the Integration of Spillovers
- 4.1 How IMF Views Connect to Outcomes: A Closer Look
- 4.2 Areas of Possible Improvement in IMF Exchange Rate Advice, as Identified by Country Authorities
- 4.3 Authorities’ Views on Policy Inputs Provided by the Executive Board
- 3.1. Coverage of Optimal Reserves Levels in Article IV Issues Papers, 2001–05
- 3.2 Staff Use of Analytical Methods for Exchange Rate Level Assessments, 2000–05
- 3.3 Exchange Rate Regime Advice and Its Analytical Basis
- 3.4 Coverage of Multilateral and Regional Issues, by Country Group
- 3.5 Selected Coverage of Exchange Rate Issues in the World Economic Outlook, 2000–05
- 4.1 Survey of Authorities: Limits to IMF Impact
- Background Document Figures
- A1.1. The Provision of IMF Exchange Rate Policy Advice
- A3.1 The Underlying Current Account Position and the Saving-Investment Balance
- A3.2 Examples of CGER Estimates, 2000–06
- A3.3 Methodologies Used in the IMF’s Exchange Rate Level Assessment, 2000–05
- A4.1 Exchange Rate Coverage Across Countries
- A4.2 Elements in Staff Exchange Rate Assessment
- A4.3 Elements in Selected Issues Papers, 2001–06
- A4.4 Analytical Tools Used to Assess Exchange Rate Levels
- A4.5 Exchange-Rate-Related Topics in Selected Issues Papers, 2001–05
- A4.6 Policy Inferences in Selected Issues Papers, 2001–06
- A6.1 Survey of Authorities: Relevance of Issues for Internal Discussions
- A6.2 Survey of Authorities: Coverage of Discussions with IMF
- A6.3 Staff Survey: Coverage of Discussions with Authorities
- A6.4 Staff’s Analysis and Assessment
- A6.5 Staff Analysis and Assessment: Major Areas of Disagreement
- A6.6 On the Nature of the Dialogue: Interactions Between Authorities and Staff
- A6.7 On the Nature of the Dialogue: Off-the-Table Issues and Leaks
- A6.8 On the Nature of the Dialogue: Sources of Analysis and the Executive Board Contribution
- A6.9 Improving the Substance and Usefulness of Discussions: Analytics
- A6.10 Improving the Substance and Usefulness of Discussions: Implementability
- A6.11 Improving the Substance and Usefulness of Discussions: Delivery
- A6.12 Opinions about IMF Impact on Countries’ Major Decisions on Exchange Rate Policy
- A6.13 Surveys of Authorities and Staff: Views on the Role of the IMF
- A6.14 Surveys of Authorities and Staff: Views on the Role of the IMF
- A6.15 Authorities’ Concerns on the Approach the IMF Used to Assess Regime Choice or Suitability
- A6.16 Authorities’ Views on the IMF’s Methodologies in the Assessment of the Equilibrium Level of Exchange Rates
- A6.17 Authorities’ Views on the IMF’s Methodologies in the Assessment of External Competitiveness
- A6.18 Authorities’ Views on the Usefulness of the IMF’s Analysis Based on the Experience of Other Countries
- A6.19 Survey of Authorities: Global or Regional Spillovers Affecting Your Country’s Exchange-Rate-Related Developments
- A6.20 Survey of Authorities: Global or Regional Impact of Your Country’s Exchange Rate Policy
- A6.21 Staff Survey: Impediments to Clear and Candid Treatment of Exchange Rate Issues
- A6.22 Staff Survey: Quality of IMF Analysis
- A6.23 Staff Survey: Areas of Significant Room for Improvement
- A6.24 Staff Survey: Agreement with Selected Statements on Data Quality
- A6.25 Staff Survey: Internal Sources of Help for Staff’s Work on Exchange Rate Issues
- A6.26 Staff Survey: Overall Usefulness of the CGER Exercise
- A6.27 Perceived Change in the Overall Quality of IMF Staff’s Analysis and Assessment over the Evaluation Period
- A6.28 IMF Impact on Major Exchange Rate Policy Decisions and Differences in Emphasis in Policy Discussions
- A6.29. Focus of Discussion with the IMF
- A6.30 Authorities’ Agreement with Staff Analysis
- A6.31 Off-the-Table Issues
- A6.32 The IMF’s Impact on Major Exchange Rate Decisions
- A6.33 The Role of the IMF
- A6.34 Perceived Change in the Overall Quality of IMF Analysis
- A7.1 How IMF Views Connect to Outcomes: A Closer Look
- Background Document Tables
- A3.1. Use of Multiple Methods in the Assessment of Exchange Rate Levels by the IMF, 2000–05
- A4.1 Global Linkages in Selected Issues Papers, 2001–06
- A4.2 Cases of Inconsistent De Facto Exchange Rate Regime Classifications
- A4.3 Exchange Rate Advice and Its Analytical Basis
- A5.1 Economies Selected for Detailed Analysis
- A5.2 Features of the 30 Sample Economies
- A6.1 Authorities’ Views of IMF Impact on Major Exchange Rate Policy Decisions
- A6.2 Impact and Restrictions on Issues for Discussions
- A6.3 Impact and Agreement with Staff Analysis
- A6.4 Impact and Aspects of the Authorities’ Interactions with the IMF
- A6.5 Impact and Views of How the Quality of Analysis Has Changed
- A6.6 Views on Overall Quality Change and Staff Analysis
- A6.7 Views on Overall Quality Change and Implementability
- A6.1a. Survey of Authorities’ Responses
- A6.1b. Staff Survey Responses
- A6.1c. Authorities’ Response and Staff’s Country Selections
- Statement by the Managing Director, Staff Response, IEO Comments on Management and Staff Responses, and the Chairman’s Summing Up
- Statement by the Managing Director
- Staff Response
- IEO Comments on Management and Staff Responses
- The Chairman’s Summing Up
The following conventions are used in this publication:
- In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
- An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
- “Billion” means a thousand million; “trillion” means a thousand billion.
- “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to 1/4 of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available 10 to 20 years after their issuance, depending on the series.
Exchange rate surveillance lies at the core of the IMF’s responsibilities. This report concludes that the IMF was simply not as effective as it needs to be to fulfill this core responsibility. While acknowledging the progress made in some areas over the period reviewed (1999–2005), the report identifies an “effectiveness gap” in the Fund’s performance, suggests reasons for its existence, and points to a number of measures to help remedy it. In this context, the report calls for a major refocus of efforts aimed at enhancing the effectiveness of the IMF’s analysis and advice as well as reenergizing its contribution to policy dialogue with member countries—a view broadly endorsed by the IMF Executive Board.
The problems highlighted cannot be solved overnight, and it will take time to implement the report’s recommendations. In the period between the inclusion of the topic in the IEO’s work program in June 2005 and its discussion at the IMF Executive Board in May 2007, the IMF has pursued several policy initiatives related to its exchange rate policy advice. These initiatives include reviewing the 1977 Surveillance Decision (culminating in approval of a new Decision in June 2007); considering a new “remit” for surveillance; and undertaking a multilateral consultation on global imbalances. By design, the IEO evaluation was based on the record through 2005 and did not deal directly with these current policy discussions. It focused instead on issues of both the substance and procedure of surveillance over exchange rate policies. In particular, while the report argues that a revalidation of the fundamental purpose of surveillance is warranted, no direct connection was made between the shortcomings noted in this report and the review of the 1977 Decision. Indeed, the report highlights that there are problems to be addressed, without delay, irrespective of whether or when changes are made to the Surveillance Decision. The key to solving these problems lies in ensuring the trust of countries and willingness to cooperate within what-ever legal framework is in place, and this will take time and concerted efforts.
The report contains tough messages. It is a strength of the IMF that it allows such a frank and independent assessment to be made. As there is no professional consensus on many of the analytical issues involved, it is perhaps not surprising that staff and management have a different perspective from that taken in the report, as is apparent from their responses. Nevertheless, the IEO maintains that, no matter how complicated the issues, the performance bar for the IMF must be set very high. Fortunately, there is agreement that the issues covered in the report are important, and that further improvements are necessary. It is hoped that the IEO’s findings will contribute to discussions on how these are to be accomplished.
Thomas A. Bernes
Independent Evaluation Office
IMF Exchange Rate Policy Advice
This report was prepared by an IEO team headed by Shinji Takagi and John Hicklin, and including Nils Bjorksten, Mariano Cortes, Ingo Fender, Emily Ku, Halim Kucur, and Allen Stack. It also benefited from contributions by Ozlem Arpac, Markus Berndt, Ramya Ghosh, Javier Hamann, Martin Kaufman, Steve Kayizzi-Mugerwa, Roxana Pedraglio, David Peretz, Joanne Salop, Reza Siregar, and Scott Standley. Jack Boorman, Scott Clark, Jeffrey Frankel, Carlos Massad, and Edwin Truman acted as senior advisors to the evaluation. Administrative assistance was provided by Annette Canizares, Arun Bhatnagar, and Jeanette Abellera, and editorial assistance by Rachel Weaving and Esha Ray. The report was approved by Thomas A. Bernes.
In cases of potential conflict of interest, team members recused themselves from interviews with country officials or staff. In addition, John Hicklin recused himself from judgments on various countries and issues with which he had been associated closely as an IMF staff member.
The IEO’s findings were discussed by the Executive Board on May 9, 2007. In keeping with established practice, the report and its background documents are being published as they were submitted to the Executive Board, except for minor formatting changes. The published volume also includes the official staff and management responses to the evaluation, the IEO’s reaction to these responses, and the Summing Up of the Executive Board discussion.
Annual Report on Exchange Arrangements and Exchange Restrictions
Behavioral equilibrium exchange rate
Bank for International Settlements
Biennial Surveillance Review
Central African Economic and Monetary Community
Compensatory Financing Facility
Consultative Group on Exchange Rate Issues
Composition of Foreign Exchange Reserves
Desired equilibrium exchange rate
Dynamic Stochastic General Equilibrium (Model)
Executive Board minutes
European Central Bank
Eastern Caribbean Currency Union
Emerging market economy
Economic and Monetary Union
Equilibrium real exchange rate
Exchange Rate Mechanism
Fundamental equilibrium exchange rate
Financial Sector Assessment Program
Group of Seven
Global Economy Model
Global Financial Stability Report
Monetary and Capital Markets Department (IMF)
Monetary and Financial Systems Department (IMF)
Multi-Region Econometric Model
Natural real exchange rate
Net foreign assets
Organization for Economic Cooperation and Development
Permanent equilibrium exchange rate
Policy Development and Review Department (IMF)
Purchasing power parity
Review of Exchange Arrangements, Restrictions, and Markets
Real effective exchange rate
Research Department (IMF)
Special Data Dissemination Standard
Statistics Department (IMF)
Technology and General Services Department (IMF)
Uncovered interest rate parity
West African Economic and Monetary Union
World Economic Outlook
The IMF is charged by its Articles of Agreement and a landmark 1977 Executive Board Decision to exercise surveillance over the international monetary system and members’ exchange rate policies. The overriding question addressed by this evaluation is whether, over the 1999–2005 period, the IMF fulfilled this core responsibility. The main finding is that the IMF was simply not as effective as it needs to be in both its analysis and advice, and in its dialogue with member countries.
The reasons for the IMF’s failing to fully meet its core responsibility are many and complex. Among these reasons are a lack of understanding of the role of the IMF in exchange rate surveillance; a failure by member countries to understand and commit to their obligations to exchange rate surveillance; a strong sense among some member countries of a lack of even-handedness in surveillance; a failure by management and the Executive Board to provide adequate direction and incentives for high-quality analysis and advice on exchange rate issues; and the absence of an effective dialogue between the IMF and many—though certainly not all—of its member countries.
The evidence supporting this conclusion, along with other key findings, is set out in this report. To assess the quality of the IMF’s analysis and advice and the effectiveness of its policy dialogue with the authorities, the evaluation reviewed documents for the last two Article IV consultations for the entire membership through 2005, undertook a review of internal and Executive Board documents for 30 selected economies over the full review period, surveyed IMF staff and country authorities, and held a series of interviews with government officials, market participants, academics, IMF Executive Directors or their Alternates, and IMF staff.
The evaluation report presents a detailed set of recommendations, which, if acted upon, could go a long way in improving the quality and effectiveness of exchange rate surveillance by the IMF. Implementation of these recommendations will require the full commitment and support of IMF staff, management, the Executive Board, and the authorities of member countries. Without that, it is difficult to see how sustained improvements can be made.
In this context, it is important to note that, in preparing the evaluation, the IEO found numerous examples of good analysis and dedicated, highly qualified staff teams. It is this very human capital that can form the base on which progress can be achieved.