Macroeconomic Foundation of Functioning of the IMF: An Evolutionary Journey

This paper narrates the chronicle of the evolutionary journey of theoretical foundation of functioning of the International Monetary Fund (IMF) and tries to locate various twists and turns. The initial basis of the IMF-supported adjustment programme came from an application of Polak, IMF Staff Papers 6:1–50, (1957) model that attempted an integration of monetary, income and balance of payments analyses. Subsequently, this got transformed into “financial programming models”, which got refined through IMF’s experience of lending to countries. Later during the mid-1980s, the IMF developed a modern dynamic multi-country macromodel of the world economy, called the MULTIMOD. This model was designed to study the transmission of shocks across countries as well as the short-run and medium-run consequences of alternative monetary and fiscal policies. During the late 1990s, the IMF developed a multi-country dynamic stochastic general equilibrium (DSGE) model called Global Economy Model (GEM). In recent past, IMF’s theoretical foundation came under heavy attack during the global financial crisis of 2008–2009. In particular, disconnect between macro and financial sector in IMF’s operational models has been held responsible as one of key causes behind IMF’s inability to give any early warning about built-up of risks in the US financial sector. More recently, while various refinements have been made to incorporate financial sector in IMF’s macromodel in DSGE tradition, the quest for such models is still on. In the ultimate analysis, the IMF is a quota-based organization. Its functioning and research output could reflect this skewed governance structure. Till the time, this gets addressed in a satisfactory way; the macroeconomic foundation of IMF functioning will be a hostage of the interests of principal shareholders of the IMF.