What role for IMF surveillance?

Abstract

This paper reviews two recent reports on the international monetary system, one by the Group of 10 (industrial countries) and the other by the Group of 24 (developing countries). It contrasts their recommendations for improving policy surveillance by the International Monetary Fund. Its own recommendations include the strengthening of “enhanced surveillance” to make it more formal without making it more onerous, the introduction of “shadow conditionality” to give guidance to governments about their eligibility to draw on the Fund, and the further development of multilateral surveillance along lines proposed at the Tokyo Summit. It would broaden that process, however, by shifting the focus from policy compatibility, defined with reference to exchange-rate behavior, to policy quality, defined with reference to the behavior of global aggregates such as the growth rate of world trade. The paper examines the use of target zones to manage exchange rates and argues that it would not weaken the case for multilateral surveillance, which is needed not only in setting the zones but also to make sure that policies adopted by participating countries do not impart an inflationary or deflationary bias to the international economy.