Criticisms of IMF Policies

Running Text: Econ 401
Econ 401

Econ 401
Ques1. Recent policies of the IMF have drawn a lot of criticism. Discuss these criticisms
Ans.1 IMF stands for International Monetary Fund which has been formed with the motive of
bringing stability in the International Monetary system (The IMF). The topic of IMF loans is
very controversial. The opponents of IMF loans say that it forces the member countries to adopt
economic policies which are actually reckless and when required they could be even bailed out.
The opponents are also of the view that IMF supports and safeguards the International bankers
with bad credit history which indirectly supports riskier international investments. There are
people who are not satisfied with the IMF Policy Prescriptions because of its uniform nature
and not being tailored as per the circumstances which differs from country to country. This
actually results in strict loan conditions making the loan amount unavailable for the borrowing
countries’ poor people. It also affects the economic growth of the country in an adverse
manner. The IMF is also criticised because it does not involves the affected countries at the
time of forming policies which makes the process opaque for others.
Ques2.
Ques2 (a) How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign
exchange risk? What is the downside of this approach?
Ans.2 (a) Caterpillar used the strategy of real hedge for reducing its exposure to the risk
associated with the foreign exchange rate. A good number of foreign manufacturing facilities
were established by the Caterpillar. This decision of constructing the manufacturing facilities at
different countries had actually reduced the adverse impact of changing exchange rates. It acted
in a way like when there was a rise in the value of dollar, revenues from these facilities surely
dropped however it also reduced the cost associated with manufacturing and operations.
However, in spite of dealing with the foreign exchange risk in such an appreciable manner, at
present the company is faced with the most complicated and complex business structure.
Ques2 (b) Explain the difference between Feldstein's concepts of "hot money" and "patient
money".
Ans.2 (b) Short term capital flows are referred as “hot money” and longer term investments are
considered as “patient money” as per Feldstein’s concept. Longer term investments like
Foreign Direct Investment (FDI) are nothing but the real assets which have been constructed or
brought by the firms in the foreign country for the purpose of production of goods. Here we

Econ 401
could see that FDI is not even related with currency, debt crisis or banking. Whereas, hot
money refers to the international investments made by the investor in the financial instruments
which is capable of getting liquidated and could be even taken out of the country in a shorter
period of time. According to Feldstein, the business owners and managers still prefers to keep
the patient money at the home country the reason for which it is still rare. Since the investors do
not have enough knowledge about the foreign market the patient money is still available in a
minimal number. However, the availability of patient money could actually make the working
of global capital market more efficient. Feldstein even is of the view that excessive flow of hot
money in and out of the country and little patient money actually lead to the economic
problems in Mexico during mid-1990s (Hill, 2019).
Ques3.
Ques3 (a) Identify and explain four strategies that a firm can use to minimize its foreign
exchange exposure.
Ans.3 (a) A firm can reduce its risk associated with foreign exchange in the following manner-
1. Identify Countries with Strong Currencies: the firms should always try to identify and
choose those countries which have strong as well as rising currencies. Usually the
countries with high debt to GDP ratio have to witness a fall in the value of the currency
as compared to those with low debt to GDP ratios.
2. Foreign bonds react vulnerable to currency fluctuation: When the investments are done
in the foreign bonds index, the fluctuations related to currency can be either plus ten or
minus ten. These changes are actually double of return to be received on bond.
3. Choose Currency Hedged funds for Investment: It is always preferable to invest in
either mutual funds or exchange-traded funds which are hedged. It helps in protecting
the foreign returns on investment. It also helps in reducing the loss because these funds
incorporate the use of investments like futures and options in order to hedge the bonds’
or equities’ currency risk.
4. Diversify Globally: If a firm is investing in loads of foreign securities then it is
advisable not to put all the money into single basket rather they should invest the
money in multiple regions. This would result in the risk diversification (Gustke).