IMF: No “Zeal for the Extremes”
A Letter to the Editor

By Alexander K. Swoboda
Senior Policy Advisor
Research Department
International Monetary Fund

The Economist
Submitted but not published
November 22, 2000

Sir:

Your article on “Currency Dilemmas” (November 18) is an interesting contribution to the debate on fixed versus floating exchange rates, but its characterization of the IMF’s position on exchange rate regimes as “zeal for the extremes” is inaccurate.

The IMF’s position is that no single exchange-rate regime is best for all countries or in all circumstances, and that the choice facing any country is not just between the two extreme alternatives of free float and rigid peg. We did note in our recent Occasional Paper (No. 193) on “Exchange-Rate Regimes in an Increasingly Integrated World Economy” that a number of countries have found it increasingly difficult to sustain intermediate regimes in a world of highly integrated markets. One consequence is the observed (though limited) move toward the extremes of the spectrum.

But intermediate regimes remain appropriate in many cases, especially for developing countries that are less integrated with the world’s financial markets, or as part of a strategy aimed at bringing inflation down from very high levels. In addition, emerging market economies opting for a greater degree of exchange-rate flexibility will still need to pay close attention to the exchange rate when setting macroeconomic policies, even occasionally intervening in the foreign exchange market.

The IMF’s Articles of Agreement leave it up to the countries themselves to choose an exchange rate regime. What the IMF does insist on, however, is consistency between the exchange-rate regime that a country chooses and the macroeconomic, especially monetary, policies it follows. The IMF works closely with its member countries to ensure this consistency. And it will not lend in support of what appears, ex ante, to be an unsustainable exchange-rate peg.

In the end, consistency boils down to this: especially (but not only) in a world of mobile capital, you cannot, at least for a prolonged period, have your cake (fixed exchange rates) and eat it too (monetary independence). Or if you prefer the French version, you cannot have both le beurre (monetary independence) and l’argent du beurre (an unchanging exchange rate).