Intervention Versus Regulation: The Role of the IMF in Crisis Prevention and Management

In this working paper, E. V. K. FitzGerald, of the Finance and Trade Policy Research Center at the Oxford University, investigates roles that the International Monetary Fund (IMF) might play given its mandate to provide institutional support for a global capital market that can promote trade and investment and given current worldwide economic instabilities, such as highly volatile exchange rates and financial and macroeconomic instabilities experienced in nonindustrialized countries. The experience of steady growth and price stability under the Bretton Woods system is often cited in support of a return to a managed fixed- rate system. FitzGerald contends, however, that although exchange rate instability might be related to the major financial crises of the past 20 years, such instability is not the source of financial crises; rather, factors such as the worldwide integration of financial markets and the development of heterogeneous financial instruments have created new sources of instability. In the new worldwide financial system exchange rates function as asset prices (that is, they reflect international capital flows) as well to regulate trade flows. Current account balances are, then, more likely a function of internal imbalances than of trade imbalances. Moreover, because interest rates reflect the desire to hold a given stock of bonds, their fluctuation does not cause international capital markets to clear (that is, cause saving to equal investment on a global scale).