Working Paper No. 349
By Gregor Irwin, Adrian Penalver, Chris Salmon and Ashley Taylor
We develop a model in which countries can protect themselves against shocks by subscribing to a credit union that shares the key features of the International Monetary Fund, or by self-insuring through accumulating reserves. We assess the impact of the increasing heterogeneity of the Fund’s membership on the political equilibrium Fund size and hence its effectiveness as a credit union. We find the Fund’s existing lending framework is well suited to a world in which its members have homogeneous interests, but as the membership has become more heterogeneous the Fund is increasingly unlikely to provide financing on a sufficient scale to meet the demands of higher-risk members, leading them to rely more heavily on self-insurance. We conclude that the framework governing the Fund’s lending operations may no longer be appropriate.