Wednesday, April 19, 2006

Taylor on the IMF

Stanford economist John Taylor has an article in today's Wall Street Journal about the International Monetary Fund. Although some are concerned that "the IMF is in eclipse, " Taylor argues that policymakers need not be worried about "the recent sharp decline in IMF loans outstanding." Why? Here is his bottom line:

The IMF has intervened in fewer crises in part because there are fewer crises to intervene in. And there have been fewer crises in part because of the expectation that the IMF will intervene less: Anticipating fewer large-scale loans from the IMF, countries have built up reserves and greatly improved monetary and fiscal policies.
John seems to be suggesting that the IMF is moving toward a policy rule under which it resists country bail-outs. A credible IMF commitment to this policy rule improves countries' decisions, which in turn means we have fewer crises in the first place. In short, he is viewing IMF policy through the lens of Kydland and Prescott's work on time inconsistency. (My next post gives a brief overview of this topic.)

Maybe this is right. Or maybe we have just been lucky. The real test of the Taylor hypothesis will come when a crisis does occur somewhere. Then we can see whether the IMF is in fact more resistant to bail-outs than it was during what John calls "the bad old days." (John is not completely clear what he means by this phrase, but it seems to refer to the Mexican and Asian IMF programs during the 1990s, orchestrated by Rubin, Summers, et al.)