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Mr. Alessandro Prati, Mr. Luca A Ricci, Lone Engbo Christiansen, Mr. Stephen Tokarick, and Mr. Thierry Tressel


Assessments of exchange rate misalignments and external imbalances for low-income countries are challenging because methodologies developed for advanced and emerging economies cannot be automatically applied to poorer nations. This paper uses a large database, unique in the set of indicators and number of countries it covers, to estimate the relationship in low-income countries between a set of fundamentals in the medium to long term and the real effective exchange rate, the current account, and the net external assets position.

Mr. Tamim Bayoumi, Mr. Hamid Faruqee, Mr. Douglas Laxton, Mr. Philippe D Karam, Mr. Alessandro Rebucci, Mr. Jaewoo Lee, Mr. Benjamin L Hunt, and Mr. Ivan Tchakarov


Over the past two years, the IMF staff has been developing a new multicountry macroeconomic model called the Global Economy Model (GEM). This paper explains why such a model is needed, how GEM differs from its predecessor model, and how the new features of the model can improve the IMF’s policy analysis. The paper is aimed at a general audience and avoids technical detail. It outlines the motivation, structure, strengths, and limitations of the model; examines three simulation exercises that have been completed; and discusses the future path of GEM.

Mr. Ales Bulir, Mrs. Marianne Schulze-Gattas, Mr. Atish R. Ghosh, Mr. Alex Mourmouras, Mr. A. J Hamann, and Mr. Timothy D. Lane


This paper reviews the design of and experience with IMF-supported programs formulated in response to capital account crises in the 1990s, focusing on the experiences of eight countries: Turkey (1994), Mexico (1995), Argentina (1995), Thailand (1997), Indonesia (1997), Korea (1997), the Philippines (1997), and Brazil (1998). The capital account crises in emerging markets confronted both the affected countries and the IMF with a new set of challenges. The central feature of all these crises was the rapid reversal of capital inflows, bringing about a large and abrupt current account adjustment with pervasive macroeconomic consequences. The crises were characterized by an over-adjustment of external current accounts in relation to what was needed for any reasonable means of sustainability. This over-adjustment was associated with severe macroeconomic disruptions. Beyond the importance of crisis prevention, the experience of these countries suggests a number of lessons for program design in the context of high capital mobility—such as the appropriate roles for monetary, fiscal, and structural policies.

International Monetary Fund. Research Dept.
This paper discusses the underlying objectives of the exchange rate regime are necessarily related to broader objectives of the international financial system and the international economy. The exchange rate regime should help to promote a satisfactory working of the adjustment process. The exchange rate regime should help to promote, or at least support, the pursuit of economic and financial policies that contribute to countries’ domestic objectives, as regards both real economic variables and financial variables, notably including the degree of price stability. Attainment of the underlying objectives for the exchange rate regime suggests a number of instrumental or operational desiderata, which are listed below without regard to potential conflict between them and therefore without consideration of any trade-off among themselves. A system of adjustable parities and narrow margins should score well on the objective of exchange stability, provided that the adjustments are not too large or too frequent.
International Monetary Fund. Research Dept.
This paper outlines the payment agreements and trade agreements. Resident inconvertibility in relation to other inconvertible countries is largely organized on the basis of bilateral trade agreements establishing quotas for imports, exports, and invisibles, and of the Organization for European Economic Cooperation (OEEC) Code of Liberalization. Resident inconvertibility vis-a-vis convertible countries is implemented mainly by unilaterally imposed quantitative import and exchange restrictions that usually are subject to a high degree of administrative discretion. Under bilateral payments agreements, the partner countries undertake to affect their reciprocal current settlements in a way that will minimize the use of convertible exchange and gold. In a typical case, the two central banks open accounts in their respective currencies in each other’s names, but agreements may also provide for one (main) agreement account. Settlements in convertible currencies or gold have to be made only when one partner’s net debtor position in the designated accounts exceeds an amount established in the agreement as the limit up to which each partner is prepared to sell its currency for the other’s currency without demanding cover.