Information about Asia and the Pacific Asia y el Pacífico
IEO Evaluation of Exchange Rate Policy
Front Matter

Front Matter

International Monetary Fund. Independent Evaluation Office
Published Date:
August 2007
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Information about Asia and the Pacific Asia y el Pacífico
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© 2007 International Monetary Fund

Production: IMF Multimedia Services Division

Cover: Massoud Etemadi

Typesetting: Alicia Etchebarne-Bourdin

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Cataloging-in-Publication Data

IMF exchange rate policy advice / [Prepared by an IEO team led by Shinji Takagi and John Hicklin]—[Washington, D.C.]: International Monetary Fund, 2007.

p. cm.

Includes bibliographical references.

ISBN 9781589066496

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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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


Back-to-office report


Central African Economic and Monetary Community


Compensatory Financing Facility


Consultative Group on Exchange Rate Issues


Composition of Foreign Exchange Reserves


Desired equilibrium exchange rate


Developing country


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


Inflation targeting


Monetary and Capital Markets Department (IMF)


Monetary and Financial Systems Department (IMF)


Medium-Term Strategy


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)


Technical assistance


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.

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