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NANCY BIRDSALL and ANDREW STEER

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Sanjeev Gupta, Mr. Leslie Lipschitz, and Mr. Thomas H. Mayer

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

PETER M. KELLER

Controlling any monetary aggregate involves an ongoing process compared with discretionary policy decisions, such as changes in the exchange rate or in the trade and payments system. At the same time, the effects of a monetary disturbance on other variables are not instantaneous; the salient problem therefore in determining the appropriate rate of monetary expansion for the future is to take account of the lagged effects on these aggregates. However, the precise structure and length of the lags involved are in general not known, nor are they easy to determine. Moreover, although governments can control domestic credit of the banking system, experience in countries that resort to indirect controls—for example, discount rate policy, reserve and liquidity ratios, and open market operations—shows that credit objectives cannot be met with precision at every moment in time.1 Furthermore, depending on the individual country, external and internal credit markets outside the banking system may play a major role and influence aggregate demand and the balance of trade and payments.

Ms. G. G. Garcia

Abstract

This paper demonstrates a well-designed deposit guarantee system can strengthen incentives for owners, managers, depositors and other creditors, borrowers, regulators and supervisors, and politicians. Borrowers should be aware that they will have to repay their loans if their bank fails and will be encouraged to keep their loans current where offsetting is limited to past-due loans. The performance of insurers, regulators, and supervisors as agents will improve where they know that they can take justifiable actions without political interference and will be held accountable for their actions to their principals. Despite the improvements, and possibly partly because there are issues in deposit insurance design that remain to be resolved, financial crises have been prevalent during the 1990s. This situation has forced a number of countries to offer a blanket guarantee to restore confidence and to allow the continued functioning of the financial system while the authorities take time to design a plan for the resolution of the crisis.