A Proposal for the IMF: A New Instrument of International Liquidity Provision for Emerging Markets and Developing Economies

Laura Alfaro, Guillermo Calvo, Jose De Gregorio, Augusto de la Torre, Pablo Guidotti, Enrique Mendoza, Ernesto Talvi, Liliana Rojas-Suarez and Andrés Velasco

No 345, Policy Papers from Center for Global Development

Abstract: This paper addresses a critical flaw in the international financial system: the failure to address the inherent asymmetry between countries that issue reserve currencies and those that do not, leaving the latter vulnerable during systemic liquidity crises. We propose an IMF-managed Emerging Market Fund (EMF) to confront these crises in emerging markets and developing economies. The EMF would be able to make temporary purchases of sovereign debt in secondary markets when financial contagion is not justified by economic fundamentals. Unlike typical IMF tools, the EMF focuses on stabilizing bond markets rather than providing country-specific loans. The EMF would independently determine when and how to intervene, as well as which basket or index of countries would be subject to intervention. Crucially, countries would not need to request activation, avoiding the stigma of seeking IMF support. At the end of the paper, we answer “Frequently Asked Questions” to clarify key elements of the proposal.

Keywords: emerging markets; international financial architecture; International Monetary Fund; financial crisis; financial contagion (search for similar items in EconPapers)
JEL-codes: E44 F33 F34 G15 O16 O19 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2024-10-15
New Economics Papers: this item is included in nep-ban
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