Chapter 1: Negative Net Resource Transfers as a Minskyian Hedge Profile and the Stability of the International Financial System
Jan A. Kregel1 From IMF exchange rate stabilization policy to IMF international stability policy The response of official financial institutions to the 1980s debt crisis produced an important change in the impact of their support to developing countries for adjustment to external imbalances. Before the breakdown of the Bretton Woods fixed exchange rate system, IMF lending was to support exchange rate stability. Countries could draw against their quota funds to meet external claims on domestic residents at its par rate (or at the newly agreed par rate) if they had insufficient foreign exchange earnings. In exchange the country agreed to adjust domestic economic policies to eliminate fundamental disequilibrium and bring a return to external balance. The policies that were the condition of the lending had as their basic objective the creation of an external surplus that would allow the support to be repaid within a relatively short period.2 The causes of the external imbalances were usually identified as excess domestic absorption due to a fiscal imbalance created by excess government spending, or exchange rate overvaluation due to a domestic inflation differential created by excess government spending. As a result the policies sought to reduce absorption by reducing domestic incomes. This was achieved by creating a fiscal budget surplus supported by monetary restriction. If the excess demand had also produced an inflation differential, an exchange rate adjustment sought to change relative prices of traded goods to restore international competitiveness. The adjustment lending was close to what are called ‘bridging loans’ that...
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