Working Paper: CEPR ID: DP1414
Authors: Marcello De Cecco; Francesco Giavazzi
Abstract: The question addressed in this paper is whether the IMF should be involved in Mexico-style crises and, if the answer is positive, whether the existing IMF financing mechanisms are adequate ? both in terms of the volume of funds that can be mobilized and the speed at which they can be mobilized ? to support the crisis-management role that the Fund would play. The paper outlines a plan that satisfies three characteristics: (i) speed, because crisis intervention cannot wait; (ii) risk redistribution, because speed will always come at the cost of higher risk, and this needs to be redistributed across lending countries, and the justification for IMF intervention lies in the ability of this institution, compared with international agencies, to redistribute risk across a large number of potential lenders; (iii) temporary creation of liquidity, because a mechanism designed for crisis management should not produce a permanent increase in international liquidity.
Keywords: IMF; Special Drawing Rights
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| IMF's financing mechanisms (F33) | effectiveness in crisis management (H12) |
| IMF's ability to redistribute risk (F65) | effective intervention (I24) |
| rapid intervention (H84) | stabilization of economies (E63) |
| speculative attacks (D84) | devaluations (F31) |
| IMF intervention (F33) | stabilization of currencies (F31) |
| rapid liquidity provision (E41) | moral hazard (G52) |
| effective management of SDRs (E61) | mitigate risks of speculative attacks (F31) |