Richard Bart, and Chorng-Huey Wong
Published Date:
June 1994
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Let me again welcome all of you and thank you for your participation in this seminar. Every year the IMF Institute holds a seminar for high-level officials that offers them, among other things, an opportunity to discuss important issues. Experience has shown that this exchange of views is probably one of the most valuable aspects of the seminar. As participants, you will learn as much from talking to one another and discussing common problems and experiences as you will from listening to the lecturers, good as they may be. And this year, this exchange of views will be even more stimulating than it has been in the past, since in the last year the IMF has become a truly universal institution: nearly all the world’s countries are now members.

As our Managing Director has pointed out, this year’s topic is one that lies at the core of the IMF’s responsibilities. Wide swings have taken place in both the theory and practice of exchange rate policy. After the breakdown of the Bretton Woods system, floating not only became respectable but was recommended by many academics, and a number of countries adopted floating regimes. But after some years, disillusion set in about the effects of floating, leading to a return to more stable exchange rates. This trend was particularly strong in Europe, which was making great progress toward a fixed exchange rate system and common currency until the turmoil of the last month. Now the mood is changing again. It is interesting that the Nordic countries (except Denmark), which had for a long time followed a flexible exchange rate policy and then decided to peg their currencies to the European currency unit (ECU) or another strong currency, have in the past few weeks abandoned pegging and gone back to floating. It was also interesting to hear Bundesbank President Helmut Schlesinger observe that the European Monetary System (EMS) is encouraging speculation. This is almost an echo of the German criticism of the Bretton Woods system as an engine of inflation. Maybe Wolf-Dieter Donecker can tell us more about the German position on the EMS and exchange rate arrangements.

It is not surprising that in this confusion, developing and transition economies have adopted various exchange rate regimes and policies. You will have ample opportunity to discuss their experiences during the seminar.

Is there an IMF doctrine on exchange rate policy? Under Bretton Woods, there was a very clear one: exchange rates were fixed but adjustable—in fact, they had to be adjusted if there was a structural disequilibrium—and in theory they could not be changed without the IMF’s agreement. Since the breakdown of Bretton Woods and the adoption of the Second Amendment to the Articles of Agreement, however, the IMF has followed Article IV, which sets out the general obligations of members. According to the Article, members shall

(i) endeavor to direct economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability;

(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustments or to gain an unfair comparative advantage over other members; and

(iv) follow exchange policies compatible with the undertakings under this Section.

The second section of Article IV states that all IMF members are free to choose their own exchange rate system: their only obligation is to notify the IMF. Section 3 concerns IMF surveillance over exchange rate policies. The Executive Board of the IMF elaborated on Section 3 through a decision made in 1977 that adopted “Principles for the Guidance of Members’ Exchange Rate Policies” (Guidelines for Surveillance).

Both the Articles and the Guidelines are couched in fairly broad terms that are open to interpretation. One example is the reference in the Guidelines to the obligation to intervene in the exchange market to counter “disorderly conditions.” Shortly after the Guidelines were adopted, “disorderly conditions” was interpreted as meaning a change in the effective exchange rate of more than 1 percent in one day. Today, 1 percent is a fairly small change; it is not infrequent to see exchange rates change 2–3 percent in one day. Theory follows the practice and realities of the market.

The IMF puts perhaps greater emphasis on another aspect of exchange rate policy: the convertibility and maintenance of a multilateral exchange rate and payments system. You probably know that surveillance and consultation missions with the membership derive from the old Article VIII under the original Articles of Agreement. Initially, the purpose of the annual consultations—which continue to this day under Article IV—was to make sure that members were in a position to maintain the convertibility of their currencies. Convertibility has always been a concern because it is the basis of a multilateral payments system. IMF surveillance has in part been aimed at ensuring that conditions conducive to maintaining convertibility are present and at encouraging countries to remove any remaining restrictions on current payments. It is interesting that neither the original Articles nor the subsequent revision says very much about capital transactions. Members are under no formal obligation to remove restrictions on capital movements. At the same time—and again, practice and theory have moved together—the IMF has supported recent efforts by a number of countries to liberalize and remove restrictions on capital movements.

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