Section II The Role of Research

International Monetary Fund
Published Date:
April 2000
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What Is Research and Why Is It Needed at the Fund?

Definition in the Context of the Fund

19. Research can mean different things to different people. Our terms of reference note that “the boundaries between research and operational work are not clear-cut, since much of the staff’s regular work on surveillance and the use of Fund resources involves elements of research.” In other words, research in the Fund is, in many cases, an intermediate input into many of the Fund’s other activities.

20. Recognizing this, in the context of the Fund, we define research widely as the set of activities that provide an analytical foundation for the Fund’s operations. These activities might involve either developing new or improved theoretical and empirical frameworks and databases or making use of existing frameworks to provide an analytical basis for decision making and policy advice. Research, in whatever form it takes, should be thought of as an investment. Research adds to the stock of the Fund’s knowledge and human capital and feeds through into operational work to achieve the overall objectives of the Fund.

21. For the purposes of our evaluation, we have identified three categories of research at the Fund. Research in each category has different objectives and can result in different end products—some of which will be stand-alone research papers while others will be incorporated into staff reports, papers presented to the Executive Board, or internal memoranda.

Policy Foundation Research

This is research that develops basic analytical tools and frameworks on which the development and analysis of policy rests. Some research of this kind is done in academia. At its broadest, it covers a wide variety of research, some of which is only very distantly related to policy. Policy foundation research also includes the creation of new data sets that are essential for sound empirical research. Some recent examples of policy foundation research conducted in the Fund include the following:

  • “Are Currency Crises Predictable?” This paper evaluates the effectiveness of three different pre-1997 econometric models in predicting currency crises.

  • “Asymmetric Information and the Market Structure of the Banking Industry.” This paper examines the role of asymmetric information in the determination of the equilibrium structure of loan markets in the context of a multiperiod model of spatial competition.

  • “Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currency?” This paper investigates whether volatility spillovers from the derivative market destabilize the underlying cash market and disrupt the exchange rate policy. The paper examines three emerging market countries—Mexico, Brazil, and Hungary—that have already allowed derivative contracts on their currencies to be traded.

Policy Development Research

This is research that draws on policy foundation research to create the broad policy frameworks (strategy) that guide the Fund’s operations. Recent examples of policy development research conducted in the Fund include the following:

  • “Sequencing Capital Account Liberalization: Lessons from the Experiences in Chile, Indonesia, Korea, and Thailand.” This paper examines the sequencing of capital account liberalization and draws lessons from experience in four emerging market economies: Chile, Indonesia, Korea, and Thailand.

  • “IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment.” This paper examines the 1997/98 Fund-supported programs in each of these countries and draws lessons from the experience.

  • “Dollarization: Implications for Monetary Policy.” This paper reviews recent trends in the use of foreign-denominated monetary assets in developing countries, then analyzes the implications for the choice of exchange rate regime and choice of monetary aggregate for programming purposes.

  • “The Scope for Inflation Targeting in Developing Countries.” This paper considers the wider applicability of inflation targeting as a monetary policy framework in several developing countries.

Policy Analysis Research

This is research that draws on policy development and policy foundation research. It is research that looks at the specific details of a policy problem and is needed to provide policy advice in the day-to-day operations (tactics) of the Fund. For example:

  • “Measuring Currency Volatility in Poland.” This paper assesses the degree of volatility of the Polish zloty in currency markets and considers whether the volatility of the zloty may be increasing over time.

  • “The Transmission of Monetary Policy in Israel.” This paper investigates the transmission of monetary policy to real activity in Israel from January 1990 to April 1997 and assesses whether monetary policy significantly influences real activity and the relative importance of different transmission channels from monetary policy to real activity.

  • “Inflation Targeting in Korea: An Empirical Exploration.” This paper explores some of the practical aspects of a move toward inflation targeting in Korea and assesses whether an inflation-targeting framework is likely to be successful in Korea.

22. The first two categories (policy foundation research and policy development research) require a substantial amount of time to produce. The third category, policy analysis research, can sometimes involve a long research process, but often covers research conducted in relatively short timeframes (a few days to a month).

23. While there is likely to be disagreement over the terms we have used to describe each type of research, or which category certain specific pieces of research fall into, such disagreements should not detract from the importance of the general conceptual distinction that we are trying to make between the categories. Inevitably, in the Fund, these types of research will blend into each other. This is desirable. Research should be both proactive and reactive. Proactively, research ideas feed into a pipeline: that is, policy foundation research feeds into policy development research, which feeds into policy analysis research, which feeds directly into the Fund’s operations. Reactively, problems or issues that arise during operations may call for research on policies, which in turn could stimulate policy foundation and policy development research.

Why Does the Fund Need Research?

24. The Fund has two core functions:

  • monitoring the economic performance of Fund members and providing them with policy advice, technical assistance, and financial resources to improve macroeconomic and financial management in their economies; and

  • monitoring and analyzing the functioning of the international monetary and payments system and providing advice for ensuring the system’s stability and efficiency.

25. Research of all three types we identified at the beginning of this section is crucial to performing these core functions successfully:

  • Policy foundation research helps the Fund assess the models and assumptions that underlie its policy advice in light of new ideas, and prevent rigid, entrenched thinking. While its relevance for policy can be somewhat less immediate, in the long term, it can fundamentally change the way the Fund thinks about policy issues.

  • Policy development research helps the Fund identify successful, as well as demonstrably failed, general policy approaches. This knowledge can be used to help design better policy recommendations for members and organize its own operational policies (such as the Fund’s lending facilities).

  • Policy analysis research helps the Fund gain a thorough understanding of how its member countries’ economies operate, and what the trade-offs between different policy options may be. This is necessary in order for the Fund to make sound policy recommendations to individual member countries and to its membership as a whole.

26. Research is the means by which the Fund ensures that the approaches it takes to the issues confronting its members are the best that the current stock of knowledge and state of the art in policy design can offer. Any organization that relies on old ways of doing things in a changing world will eventually cease to be relevant. There is much still to learn in the field of economic policymaking, and the Fund must continue to learn and update its thinking.

27. Of course, the Fund does not, and should not, try to produce all the research that is relevant for its needs:

  • There are certain areas of economic research, particularly some areas of economic theory, where the relevance of the research is difficult to link to policymaking. This research is best left to academia. The Fund cannot hope to create an environment that is conducive to the production of this type of research. Even if it could, and even if the research was of extreme importance for the Fund in the much longer term, it would be difficult to justify the Fund conducting this type of research at the expense of other forms of research that have a more direct payoff to the organization.

  • The Fund can benefit from contracting with outside researchers to conduct some of the research that it needs, particularly when outsiders conduct that research in collaboration with Fund staff. This is a useful way of bringing skills and expertise that the staff do not have into the organization.

  • Most important, the Fund should make use of good research that already exists outside the organization. It is clearly appropriate for the Fund to conduct research on topics relevant to its functions that are also actively studied outside the Fund, but it should use relevant research that already exists outside, without duplicating it.

28. However, we strongly believe that the Fund should have an in-house research capacity and should rely only to a very limited extent on external researchers on contract to substitute for its own research. We consider that in-house research is essential for the following reasons.

  • Fund staff with a research orientation need to be given an opportunity to conduct research so that the Fund can continue to hire and retain the best economic minds.

  • Research is more easily drawn into the process of policymaking when the same people that conduct the research are also involved in the operational processes of the Fund.

  • Fund staff have an in-depth understanding of the problems and issues faced by the Fund’s member countries. They can use that knowledge to produce more insightful research than those approaching the problem from a more removed position.

  • Fund staff can gain an in-depth intuition from conducting their own research that can be called upon to help in the policy design process. Often, in policy design, decisions have to be made quickly. The quality of those decisions can be improved by drawing on someone who has thought about the issue in depth.

  • Successful in-house research can independently help enhance the credibility and reputation for quality of the Fund among the academic community as well as policymakers in member countries. This can produce greater confidence in the Fund’s recommendations and reduce the likelihood that the Fund’s recommendations will be ignored or doubted.

29. Some of the people we spoke to asked us whether policy foundation research should be left to the academic community. They were concerned that, for an organization with limited resources and an emphasis on operations, policy foundation research might be an unproductive luxury. Policy foundation research is relatively riskier than other forms of research because there is a greater likelihood that the research will not come up with useful results. However, in our view, when the research succeeds, the returns are very likely to be high. It is our firm belief that policy foundation research should be an important and valued component in the portfolio of in-house research activities, both for all the reasons described above, and also because

  • the objectives of academic research and the incentives in academia are different, and often not appropriate for producing research helpful for the eventual formulation of policy. However, policy foundation research in the Fund, if accompanied by the appropriate incentives, should be policy relevant even if it does not feed directly into policy work;

  • Fund staff are closer to some of the underlying, real-world issues (on which the Fund has to advise its members) than academics, so they will be able to identify and conduct policy foundation research on these issues in a more effective and timely manner; and

  • most important, policy foundation research is an essential element in generating and nurturing an organizational culture that emphasizes fresh thinking, learning, and continually challenging conventional wisdom.

Nature and Organization of Economic Research in the Fund

30. A description of the type of research conducted in the Fund and the way that research is organized is found in Annex II.

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