The Stabilizing Role of the Compensatory Financing Facility: Empirical Evidence and Welfare Implications

Manmohan S. Kumar
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Manmohan S. Kumar: International Monetary Fund

IMF Staff Papers, 1989, vol. 36, issue 4, 771-809

Abstract: Purchases under the compensatory financing facility (CFF) accounted for nearly one fourth of total credit extended by the International Monetary Fund from 1976 to 1985. To determine the extent to which the facility served its intended purpose of stabilizing foreign exchange earnings of member countries experiencing temporary export shortfalls, a methodology is developed for evaluating the CFF's stabilizing role. The evidence is used to evaluate the facility's role in stabilizing demand for international reserves and its contribution to net welfare gain. The results suggest the CFF has helped stabilize earnings, and net benefits from its use have been substantial.

Date: 1989
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