A Framework for Currency Unions and IMF Lending
IMF Blog, March 16, 2018
Source details
- Canonical URL
- A Framework for Currency Unions and IMF Lending
Other formats
Bibliographic details
- Authors: Sean Hagan, Hugh Bredenkamp
- Published: March 16, 2018
Overview and metadata
- Authors: Sean Hagan, Hugh Bredenkamp
- Date: March 16, 2018
- Context: New IMF guidance clarifying how the Fund supports members of currency unions undertaking adjustment.
- Note: Versions in عربي (Arabic), 中文 (Chinese), Español (Spanish), 日本語 (Japanese), Português (Portuguese).
Benefits and costs of membership in currency unions
- Benefits:
- Businesses can trade and invest across borders more easily.
- Member countries gain access to larger markets without facing currency risk.
- In some circumstances, currency unions can help support their members when they are hit by external shocks.
- Costs and limitations:
- Countries relinquish the independence to formulate monetary policy, complicating adjustment to shocks.
- Currency union institutions must serve the interests of all members; union-wide policy changes (e.g., monetary policy) are guided by union needs, not a single member’s needs.
- The nature of which policies are union-level versus national can evolve over time, affecting program design and implementation.
Rationale: Why guidance is needed
- There are currently four currency unions in the world—the Central African Economic and Monetary Community, the Eastern Caribbean Currency Union, the European Monetary Union, and the West African Economic and Monetary Union—all of which delegate monetary policy and, to varying degrees, exchange rate and financial sector policies to union-level institutions.
- Currency unions now account for over 15 percent of the global economy.
- Past IMF engagement with currency union institutions during programs has been somewhat ad hoc; clarified guidance aims to:
- Foster more robust programs.
- Promote more evenhanded treatment across unions.
- Provide greater clarity over when and how critical union-level actions should be incorporated into IMF-supported programs.
- Example of evolving union responsibilities:
- In 2014 responsibility for bank supervision in the euro area was assigned to the Single Supervisory Mechanism. This change meant that important financial sector supervisory actions required under earlier Greece, Ireland, Portugal, and Cyprus programs would no longer be under the control of the respective national authorities, and future programs would involve action by the Single Supervisory Mechanism where banking measures are essential.
- Experience suggests union-level policy settings (such as monetary policy) would be called for only in truly exceptional circumstances; historically union-level action has most often taken the form of measures that affect only the program country (for example, bank resolution).
When the IMF will call for union-level action (policy assurances)
- The IMF will call for policy assurances from union institutions in the following circumstances when a member requests financial support:
- When national policies are insufficient.
- Program design should be based, to the extent possible, on policies under the control of the member’s national authorities.
- Complementary measures will be sought from relevant union institutions only where essential aspects of policy have been delegated to the union level.
- When the action is critical for program success.
- The threshold is the same as for policies under the member’s own control: the measure must be deemed critical to program success—meaning that, if the measure were not implemented, the objectives of the program would be jeopardized.
- When the actions are consistent with mandates and legal frameworks.
- The Fund will not ask a union institution to take actions or make commitments that are inconsistent with that institution’s mandate and legal or institutional frameworks.
How assurances should be framed and conveyed
- Transparency:
- Assurances should be clear, specific, monitorable, and—where necessary—timebound.
- This ensures clarity about the committed action and whether it has been implemented as envisaged.
- Mode of conveyance:
- The relevant institution should provide assurances in writing, either in the form of a letter to the Fund or in a public statement.
- Different institutions may have different preferences for mode of conveyance.
- Assurances could be kept confidential only in a narrow set of circumstances, such as where announcement may trigger disruptive market movements (consistent with current policy).
Intended outcomes and principles
- The guidance:
- Does not confer any new authority on the Fund; it articulates how existing authority should be exercised in practice.
- Seeks qualitatively the same level of assurance regarding policy intentions in programs with currency union members as for countries outside currency unions.
- Aims to ensure evenhandedness and consistency across different currency unions while taking account of country and union circumstances and protecting the independence of currency union institutions.
- The IMF’s Executive Board approved the new guidance in February, representing an important step toward greater clarity in how the Fund supports members of currency unions undertaking adjustment.
Source: A Framework for Currency Unions and IMF Lending, Sean Hagan and Hugh Bredenkamp, March 16, 2018.
Content in this bundle
- 货币联盟和国际货币基金组织贷款的框架; IMF博客; 2018年3月20日
- 通貨同盟とImf融資のための枠組み; ショーン・ヘイガン ヒュー・ブレダンキャンプ; Imf ブログ 2018年3月16日掲載
- Um marco para as uniões monetárias e os empréstimos do FMI
- Un marco para las uniones monetarias y los préstamos del FMI
