The Response Speed of the International Monetary Fund

• DOI: http://doi.org/10.1111/j.1468-2362.2013.12031.x
• Author: Diego Saravia,Ashoka Mody
• Published date: 01 June 2013
• Date: 01 June 2013

The Response Speed of the

International Monetary Fund

Ashoka Mody

y

and Diego Saravia

z

y

Woodrow Wilson School of Princeton University, and

z

Central Bank of

Chile, Research Department

Abstract

The more severe a financial crisis, the greater has been the likelihood of its

management under an IMF‐supported programme and shorter the time

from crisis onset to programme initiation. Political links to the United

States have raisedprogramme likelihood but have promptedfaster response

mainly for ‘major’crises. Over time, the IMF’s response has not been

robustly faster, but the time sensitivity to the more severe crises and those

related to fixed exchange rate regimes did increase from the mid‐1980s.

Similarly, democracies had earlier tended to stall programme initiation but

have turned supportive of financial markets’demands for quicker action.

I. Introduction

Much scholarly attention has focused on the factors that have led to the

International Monetary Fund’sfinancial safety net for countries facing balance

We are grateful to Carlos Alvarad o, Quianru Song and Dante Poblet e for superb research

assistance and to Grah am Bird, Jim Boughton, Russe ll Kincaid, Franziska Ohns orge, Hui

Tong, Dennis Quinn, and Felipe Zuri ta for valuable feedbac k. Two anonymous referees and

the editor provide d constructive comments. S aravia also acknowledges financial support

from DIPUC No. 282150781. The views expressed here are those of the authors and should

not be attributed to the IMF’s man agement or Board of Direct ors.

International Finance 16:2, 2013: pp. 189–211

DOI: 10.1111/j.1468-2362.2013.12031.x

© 2013 John Wiley & Sons Ltd

of payments stress. The questions posed have been: why does the IMF (or the

Fund) lend and why do countries borrow?

1

Policy makers have also been

concerned with the amount of lending, especially for countries facing ‘exceptional’

balance of payments difficulties.

2

In contrast, surprisingly little attention has been

directed to analysing the speed at which the Fund has responded to crises. While a

few case studies have documented the pressure to react quickly

(Boughton 1997, 2000; Bordo and James 2000), there has been no systematic

attempt to examine the speed of the IMF’sresponsetofinancial crises.

And, yet, with financial markets moving ever faster, the metric of speed is

a valuable one, not only to assess how the Fund has faced the challenge but

also as a lens on broader questions of international political economy. The

decision to manage a crisis under an IMF‐supported programme is one

jointly undertaken by the crisis country and the IMF’s management and

Board of Executive Directors. Hence, response speed depends on the severity

of the crisis, the economic features and domestic politics of the crisis

country, and the political and economic relations of the crisis country with

influential Board members. These decisions, moreover, highlight the ten-

sions between the democratic process and the interests of financial markets.

Boughton (1997) regards the Latin American debt crisis of the early 1980s

as pivotal in highlighting the need for speed to prevent crises from growing

and spreading. Bordo and James (2000) observe that the importance of speed

wasreinforcedinthe1990saslargercapitalflows into emerging economies

were also associated with the risk of rapid capital outflows and financial

crises. These considerations led to discussions for prequalifying IMF mem-

bers for ready acce ss to Fund resources in the e vent of a sudden stop in

capital flows (IMF 2006). The Flexible Credit Line was introduced in

March 2009 when the importance of rapid responses was once again

emphasized by the fast‐moving Great Recessi on.

3

In this paper, we seek to ans wer several question s. Have more severe crises

prompted a faster response? Has the country’s exchange rate regi me mat-

tered? What role has the Fund’s governance structure played: in particular,

have major shareholders been relevant to the speed of response?

An even more intriguing question is whether democracies have adapted to

the financial markets’insistence on rapid decisions. The mid‐1970s, about

when our study commences, is also the start of the so‐called ‘third wave’of

1

Bird (1996) reviews th e early research; other contr ibutions include Thac ker (1999), Vree-

land (2002) and Barro and Lee (2 005).

2

The Supplemental Reserve Facility was created to meet ‘large short‐term financing’needs.

See IMF (1997).

3

http://www.imf.org /external/np/exr/fac ts/conditio.htm.

190 Ashoka Mody and Diego Saravia

© 2013 John Wiley & Sons Ltd