Dealing with country diversity: challenges for the IMF credit union model

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 22 May 2008

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.

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