About the IEO
Established in 2001, the Independent Evaluation Office (IEO) of the IMF conducts independent and objective evaluations of the IMF’s policies, activities, and products. In accordance with its terms of reference, it pursues three interrelated objectives:
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To “support the Executive Board’s institutional governance and oversight responsibilities” by contributing to accountability.
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To “enhance the learning culture within the Fund” by increasing the ability to draw lessons and integrate improvements.
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To “strengthen the Fund’s external credibility” through enhanced transparency and better understanding of the work of the IMF.
For further information on the IEO and its ongoing and completed evaluations, please see http://www.ieo-imf.org or contact the IEO at +1 202 623–7312 or at ieo@imf.org.
This report is the seventh in an IEO series that revisits past IEO evaluations five to ten years after they were first issued. Reports in this series aim to determine whether the main findings and conclusions of the original IEO evaluations remain relevant, and to identify any outstanding and new issues related to the evaluation topic that merit continued attention. The assessments are based on desk reviews of IMF documents and interviews of IMF staff and members of the Executive Board. This report reviews the 2007 IEO evaluation of the IMF’s exchange rate policy advice.
IEO
Independent Evaluation Office
of the International Monetary Fund
IMF
EXCHANGE RATE POLICY ADVICE
EVALUATION UPDATE 2017
©2017 International Monetary Fund
CATALOGING-IN-PUBLICATION DATA
JOINT BANK-FUND LIBRARY
Names: Stedman, Louellen. | Hicklin, John | International Monetary Fund. Independent Evaluation Office.
Title: IMF exchange rate policy advice : evaluation update 2017 / this report was prepared by Louellen Stedman in consultation with John Hicklin.
Description: Washington, DC : Independent Evaluation Office of the International Monetary Fund, 2017. | Includes bibliographical references.
Identifiers: ISBN 978-1-48432-5-766 (paper)
Subjects: LCSH: Foreign exchange rates. | International Monetary Fund—Evaluation.
Classification: LCC HG3881.5.I58 I444 2017
Publication orders may be placed online, by fax, or through the mail:
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P.O. Box 92780, Washington, DC 20090, U.S.A.
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E-mail: publications@imf.org
Contents
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FOREWORD
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CONTRIBUTORS
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ABBREVIATIONS
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EXECUTIVE SUMMARY
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1. INTRODUCTION
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2. KEY FINDINGS AND RECOMMENDATIONS OF THE 2007 IEO EVALUATION
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3. THE IMF’S MANDATE AND RULES OF THE GAME
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4. ELEMENTS OF ANALYSIS AND ADVICE
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Exchange Rate Regimes
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Exchange Rate Levels and External Stability
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External Balance Assessment Methodologies
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External Sector Report
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Institutional View on Capital Flows
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Reserve Adequacy
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Data
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Spillovers
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Evenhandedness
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5. MANAGEMENT AND ACCOUNTABILITY
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6. CONCLUSION
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BOXES
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2.1. IEO Recommendations in the 2007 Evaluation and Initial Proposed IMF Actions
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4.1. Estimating Current Account and Exchange Rate Norms
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FIGURE
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4.1. Conceptual Framework for Balance of Payments Stability Analysis
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ANNEXES
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1. Excerpts from IMF Articles of Agreement
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2. Status of Implementation Plan in Response to Board-Endorsed IEO Recommendations on IMF Exchange Rate Policy Advice, 2007–16
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REFERENCES
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STATEMENT BY THE MANAGING DIRECTOR
The following conventions are used in this publication:
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An en dash (–) between years or months (for example, 2016–17 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2016/17) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2017).
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“Billion” means a thousand million; “trillion” means a thousand billion.
Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available three or five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other types of documents may become available 20 years after their issuance. For further information, see www.imf.org/external/np/arc/eng/archive.htm.
Foreword
This report is the seventh in a series of evaluation updates that return to past evaluations ten years after their completion. The report revisits the 2007 evaluation of IMF Exchange Rate Policy Advice following a decade of IMF efforts to grapple with the challenges of fulfilling its role in this area, which lies at the core of the Fund’s mandate.
The 2007 evaluation found that the IMF was “not as effective as it needed to be” in fulfilling its responsibilities for exchange rate surveillance in the period 1999–2005. While acknowledging the inherent complexity of surveillance of exchange rates, including the lack of professional consensus on many of the key issues, the evaluation observed serious weaknesses in the IMF’s focus on key analytical issues and in its engagement with members.
This update finds that the IMF has substantially overhauled its approach to exchange rate policy advice since 2007. Key steps taken include: adoption of a more comprehensive approach to exchange rate surveillance under the 2012 Integrated Surveillance Decision; development of enhanced analytical tools for assessment of exchange rates and current account balances; and introduction of the annual External Sector Report setting out an integrated picture of the external balances of major economies. Increased attention to spillovers and adoption of an institutional view on capital flow management have also helped enhance IMF work in this area.
Nonetheless, the report concludes that challenges remain that limit the impact of the IMF’s work on these issues. The approach for assessing external balances and exchange rates continues to be contentious, in part reflecting differing views across the membership about the process of external adjustment. Consequently, questions persist about the evenhandedness and traction of IMF analysis and advice. There are also ongoing issues about considerations for exchange rate regime choice, the adequacy of attention to policy spillovers, the application of the institutional view of capital flows, and data availability, particularly on intervention.
In view of these persistent concerns, the IEO is now planning to include in our work program a new full-scale evaluation of the IMF’s work in the area of external assessment.
Charles Collyns
Director, Independent Evaluation Office
Contributors
This report was prepared by Louellen Stedman in consultation with John Hicklin, leader of the 2007 evaluation, with contributions from Roxana Pedraglio. Arun Bhatnagar provided administrative assistance, and Esha Ray provided editorial and production management assistance. The report was approved by Charles Collyns.
Abbreviations
| ARA |
assessing reserve adequacy (IMF) |
| AREAER |
Annual Report on Exchange Arrangements and Exchange Restrictions (IMF) |
| CDIS |
Coordinated Direct Investment Survey |
| CGER |
Consultative Group on Exchange Rates (IMF) |
| CPIS |
Coordinated Portfolio Investment Survey |
| COFER |
Currency Composition of Official Foreign Exchange Reserves (IMF) |
| EBA |
External Balance Assessment (IMF) |
| EME |
emerging market economy |
| ESR |
External Sector Report (IMF) |
| EVC |
Evaluation Committee |
| GFSR |
Global Financial Stability Report (IMF) |
| G20 |
Group of Twenty industrial and emerging market countries |
| ICD |
Institute for Capacity Development (IMF) |
| IEO |
Independent Evaluation Office (IMF) |
| IMF |
International Monetary Fund |
| IMFC |
International Monetary and Financial Committee (IMF) |
| INS |
IMF Institute (predecessor to ICD) |
| ISD |
Integrated Surveillance Decision (IMF) |
| LIC |
low-income country |
| MCD |
Middle East and Central Asia Department (IMF) |
| MCM |
Monetary and Capital Markets Department (IMF) |
| MIP |
Management Implementation Plan |
| MTS |
Medium-Term Strategy |
| PDR |
Policy Development and Review Department (predecessor to SPR) |
| PIN |
Public Information Notice (IMF) |
| REER |
real effective exchange rate |
| RES |
Research Department (IMF) |
| SDDS |
Special Data Dissemination Standard (IMF) |
| SGN |
Surveillance Guidance Note (IMF) |
| SPR |
Strategy, Policy, and Review Department (IMF) |
| TSR |
Triennial Surveillance Review (IMF) |
| WEO |
World Economic Outlook (IMF) |
Executive Summary
The 2007 IEO evaluation of IMF Exchange Rate Policy Advice found that the IMF was “not as effective as it need[ed] to be” in fulfilling its responsibilities for exchange rate surveillance in the period 1999–2005. It acknowledged the inherent complexity of this task, including the lack of professional consensus on many of the key issues. At the same time, the evaluation found a lack of understanding and consensus around the IMF’s role in exchange rate surveillance; shortcomings in the coverage and quality of IMF analysis and advice, as well as in the traction of IMF engagement with its members; a strong sense among some member countries of a lack of evenhandedness in surveillance; and issues in the management of work on exchange rates.
This report considers the extent to which the key conclusions of the 2007 evaluation remain issues for the institution. The update is based on a review of IMF documents, including a desk study of a sample of 20 Article IV staff reports, and interviews with IMF staff and Executive Directors, as well as consultations with academic experts. The update is not a full evaluation of the IMF’s analytical work, policy advice, or the traction of its advice, which would require a detailed assessment of IMF analysis and judgments, and extensive consideration of the experiences and perspectives of member countries.
The update finds that the IMF has substantially overhauled its approach to exchange rate policy advice since 2007. The 2012 Integrated Surveillance Decision (ISD) led to a more comprehensive approach that is widely accepted as a basis for exchange rate surveillance. The ISD takes into account the range of factors affecting the balance of payments position, as well as the connection between domestic and external stability, and provides for better integration of multilateral and bilateral surveillance to address spillover issues. Following the ISD, the IMF put in place extensive guidance for assessing external policies, and strengthened the analytical basis of advice. An annual External Sector Report (ESR), launched in 2012, sets out an integrated picture of the external balances of major economies, including exchange rates, current accounts, international reserves, capital flows, and external balance sheets. Increased attention to spillovers and adoption of an institutional view on capital flow management have also helped enhance IMF work in this area.
Nonetheless, the update identifies a number of ongoing challenges that impact the effectiveness of the Fund’s work in this area. The approach for assessing external balances and exchange rates continues to be contentious, in part reflecting differing views across the membership about the process of external adjustment. While recognizing staff efforts and progress made in enhancing the IMF’s approach and analysis, Executive Directors continue to raise issues with the models being used, as well as consistency and transparency in the process through which IMF staff arrive at their bottom line assessments. Consequently, questions persist about the evenhandedness and the traction of IMF analysis and advice on exchange rates.
The IEO intends to undertake a full evaluation of the IMF’s approach to external sector assessment as part of its medium-term work program, including to examine the results of a methodological review that IMF staff expects to complete before the 2018 ESR.