The IMF's Unmet Challenges

This document discusses the challenges faced by the International Monetary Fund (IMF) in maintaining exchange rates, governing capital flows, and providing benefits to all countries. It also explores the issues related to loan defaults and liquidity, as well as the failures of the dollar system. The document concludes with a discussion on the purchasing power parity theory and international fisher effects theory.

The IMF’s Unmet Challenges”
By Barry Eichengreen and Ngaire Woods, Journal of Economic Perspectives—Volume 30, Number 1—winter 2015—Pages 29–
52”,
Assignment 1
Name of the Student: ABHAYA SHARMA
Name of the University: University Of Salford
Student ID: 00447833

Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
Ethnicity to balance exchange rates.............................................................................................3
Ethnicity to govern capital flows in an systemized way..............................................................3
Observation regarding IMF and its views are dominated by influenced countries.....................4
Ethnicity to evolve an progressive market...................................................................................4
Ethnicity to the betterment of loan defaults.................................................................................4
Area of operations only extended to variances in trade market...................................................4
Distinct behaviors to furnish as more benefits to some countries...............................................5
There is an issue related to liquidity............................................................................................5
Issues related to dollar system.....................................................................................................5
Conclusion...................................................................................................................................6
Part B...............................................................................................................................................7
Purchasing power parity theory and international fisher effects theory......................................7
International fisher effects...........................................................................................................7
Different ways that helps in protecting the PPP and IEF failures...............................................9
Conclusion.....................................................................................................................................12

Introduction
There is a document that represents the IMF as international monetary fund and its significance
also confers in it, it is seen that IMF is having good returns that are very effective for
globalization and cooperation among countries at international level. Here IMF involves many
factors that affect the economic evolution and growth of countries and these factors are like
inflation rates, exchange rates and interest rate in distinct countries. In presenting the document
depth in the argument on confronts that are faced by countries and purchasing power equality,
the significance of international fisher is presented there.
Part A
Failures of the international monetary fund to face some confront
The international monetary fund is having a great significance over control of the exchange rates
and rates of inflation that significantly affect the development and growth at the international
level. There is presented an in-depth study that provides us about confronts faced by
organizations to attain their objectives and differences between setting goals and gained goals.
Ethnicity to balance exchange rates
The international monetary fund has to be developed for mainly stabilizing the exchange rates
and many acts have to be performed in this regard, it is the chief motive of evolving and
establishment of IMF. There IMF has assisted to maintain unbalance and chooses of exchange
rates up to a limit but there are organizations are unable to meet up with desired results in
balancing the exchange rates. Until the spending over approx. 85 years of establishing and
founding of IMF there has been no such steps to be taken out for balancing the exchange rates
for sustainable growth of the organization.
Ethnicity to govern capital flows in a systemized way
There is a chief intention behind establishing and implementing of IMF is governing the capital
flows and balance it in the international market. There are distinct economies in the world and
this unbalanced and disorganization of capital flow makes slower the growth and evolvement of
economies. So, the main aim of implementing the IMF is to control unbalanced capital flow in

economies. In its outcomes, there is a lack of evolvement of organizations and economies at an
international level.
The observation regarding the IMF and its views are dominated by influenced countries
For evolvement of underdeveloped nations to explain their issues regarding it at the global level
and achieve the development of many countries is the main and entire reason behind
establishing, implementation of IMF. Although, IMF having a system of voting rights and the
operational mechanism that can be adopted by only well developed and influenced countries to
utilize it as monetary plans and economic strategies of IMF. But, there is an unavailability of
concerning about economic situation by IMF without considering the other influenced and
dominating countries.
Ethnicity to evolve a progressive market
There has been a very slight change observed in advanced markets that are in the year 2011 was
32 and in the year 2013 is only 37. There is a proof of spending a vast amount of fund on
evolvement and implementation of advanced market and the initiatives that are to be taken for
this, this shows as a fact that there was not so much increment in advanced markets in the year
2013. There is a most dreadful fact is that this is still only 24% of the total market in 2013 as it
was in 2011.
Ethnicity to the betterment of loan defaults
The international monetary fund assists government an international level to meet up with their
fiscal crisis. Although, there are many countries that faced the issue of evolving and establishing
IMF with its funding due to their heavy unpaid loan repayments to financial organizations. For
IMF there is a most challenging is to decrease the defaults in loan repayments that are given by
organizations to government.
Area of operations only extended to variances in the trade market
Since the foundation of IMF is failed to extend its area and boundaries of its working until 72
years from its establishment. There is a great deficiency in expanding it’s working area has made

difficulty for an organization to make effective performance in controlling and balancing
exchange rates with inflation rates at the global level. Formerly, the organization has made
business with misbalancing trade transactions between countries. The organizations faced an
extreme failure in repayment and adjust of loans related to the war, export, import funds and then
authorization has determined to remain as red-faced at the international level community.
Distinct behaviours to furnish as more benefits to some countries
There is daily working with funds is generally provides distinct benefits to some other countries.
IMF is apparently called as rich countries club due to providing distinct and extra benefits to
powerful and growing countries. There is another failure for an organization that it is incapable
of providing basic welfare to organizations to which that are underdeveloped and developing
countries.
The organization was founded in the year 1945 and at that time the objectives of the organization
were set and not achieved by it so, the tagline of rich countries club has been made as big
dishonour for organizations at international level. Instead of violation of the rules and directions
of IMF, the rich and evolved countries provide it wishes for better maintaining of it in the daily
working of the organization. There are not any actions are taken for these evolved and powerful
countries after their continuous violation of the rules and directions of IMF. Therefore, the funds
are failed to make required neutrality in working of the organization to increase the confidence
of underdeveloped and developing countries.
There is an issue related to liquidity
There is an also chief objective of IMF is to sell and lend the foreign currencies from its stock to
its member nations to encourage liquidity at an international level. Although, there were many
initiatives were to be taken by the organization to the betterment of liquidity position but after all
these, there is no definite and permanent infusion of these issues at markets available at the
global level.

Issues related to the dollar system
There is also an issue related to transacting in dollar currency. There is many splendid pound
countries facet with many issues related to dollar currencies and there is lack of dollar currencies
in such countries is also make another reason of its failure and it turned as IMF is a very
ineffective and useless strategy to make a dollar freely providing nations.
Conclusion
it can be concluded here that IMF made many achievements but after all these successes it was
having a number of issues and fail to provide the solution for them that all are above mentioned
in the report. There are numerous challenges and issues have been faced by the organization and
not any relevant actions have to be taken for these by the fund. Therefore, it is required in future
to make more effective actions and decisions have to be taken to meeting up the challenges and
mitigate issues.

Part B
Purchasing power parity theory and international fisher effects theory
In present time the subject related to exchange rates among countries is very common and
dedicating issue of debate as economists have formulated time to time distinct theories and also
find the reasons behind the fluctuations in exchange rates continuously. Here PPP is referred to
as purchasing power parity theory, it confined as that the exchange rate is the rate between two
countries is having equality to the purchasing power of two currencies in respective countries.
The main factor of the exchange rate is the demand and supply of currencies in the country.
There are many trading transactions have to be done related to goods and services only with the
help of foreign currencies. The determination of the exchange rate in the international market can
be done only with the help of the determination of demand and supply of currency for
international transactions. Another side, PPP is related to relative purchasing power distinct
countries in the respective domestic market. Here, the provided postulate refers to that the
purchasing power of currencies in domestic markets decide the exchange rates of currencies. In
the international market, the exchange rate can be obtained through the only on price due to
competition in the market. With the help of the law of one price the unified value for a product
can be obtained for all distinct countries so, these countries can sell that particular product at a
single price.
PPP postulate is related to only goods and services which are not transacted at the international
levels like a haircut, local transportation, household services and many other goods and services.
Although the goods and services are not transacted at an international level still there is a
distinction between the prices of goods and services in domestic markets. Behind the differences
between prices of goods and services of distinct countries, there is the only factor is the
differences in their labour cost and inflation factors in numerous countries.
International fisher effects
On the other side, the impacts of international fisher refer to that the exchange rates of distinct
countries are approximately having the same value to the normal interest rates of these countries.
International fisher impacts as forecast the currency movements, in this document IEF is referred
here. For determining the movement or any fluctuations in the currency the present value of an

investment and future value of the investment is to be considered. The postulate defined as that
real interest rate in any country never involve any factors related to money and policies,
regulations related to money and many other variables. Therefore, the real interest rates of
currencies provide a better sign to expedient fluctuation in currencies as the interest rates are
having direct nexus with the movement of currencies.
As provided by IEF postulate that refers as an increment in normal interest rate will relatively
enhance the inflation rate in that country but if there is any decrement in interest rate it decreases
the inflation rate with it. If a country is having a higher inflation rate and the interest rate it has
become a reason for a higher depreciation rate for domestic currency.
There is a formula that can be used to calculate the international Fisher effect (IEF) that as
follows:
Here it is very simple and easy to understand the postulate of IEF because it confers that general
rate of interest in any country is directly related to the value of the currency of the country. If in
any country there are the increasing general rate of interest then the inflation rate along with
depreciation rate also becomes higher for a particular currency. For an instance is provided here
that, the normal rate of interest of any country A is 4% and normal interest rate in country B is
8% so in accordance with this postulate that the currency of country A will appreciate
approximately by 4% in comparison to country B, so it can Be said that the higher the interest
Rate of country B, therefore, the depreciation rate of that country will also become higher in
comparison to other countries as A. so, the nominal interest rate also affect the inflation rate and
after that exchange rate for currencies of two distinct countries.
After implementing the subject of purchasing power parity and nominal interest rates in distinct
countries the importance of derivative that derives their values from any underlying assets or

commodity due to this it lost its appropriateness. Purchasing power parity as a postulate that
explains that there is normally no contrast between the purchasing power because it confers as
the exchange rate is exactly having the same value to purchasing power regarding currencies.
Derivatives are those which derive their values from underlying assets or commodities and this
PPP postulate refers to that the exchange rate is having equal value to purchasing power in
respect of distinct currencies in different countries. According to PPP postulate the changes and
suspicion related to the value of derivate to a huge extent. As per the PPP postulate the large
extent to diminishing the value that derived from the commodity or asset. International fisher
effects (IEF) as priory mentioned that nominal interest rate in the country again diminish the
relevancy of derivative that derives the value from the commodity or underlying assets and this
lost its relevancy in regard of utilizing the rate of the interest rate. However, it is noteworthy to
note that derivative has lost its value and relevancy in determining the exchange rate even it
would not be right to say that derivative is irrelevant with PPP and IEF postulates.
Different ways that help in protecting the PPP and IEF failures
The purchasing power parity (PPP) is considered as one of the theories that are based on the
concept of the relevant purchasing power of the domestic markets of the currency of the
domestic country. Here the exchange rates that exist between them so that they would be able to
the equally help in the relating to the power of the domestic currency would be considered for
this purpose. While on the other hand this is seen that international fisher effects (IFE) are
considered as the theory that is based on the concept of what the exchange rate of a currency is
based on the general interest rates of the two countries.
Hence according to the theory, it is considered that higher the interest rate then there would be
higher the depreciation on the currency of the country. Therefore this is seen that the two
theories have different ways on the exchange rates according to which they are working. Hence
this is considered that it would be wrong to say that one of the theory is considered to be best and
other is incorrect. This is also seen that both the theories have certain pros and cons which help
in analyzing the effect on the topic which is given above.
However, it is seen that both theories have the standard that specifies the difference in the
exchange rate. This is seen that the in PPP the exchange rate between the two countries is
considered as the ratio that helps in building the purchasing power of the relevant countries of
the domestic market in which the company is working. It is seen that there are various numbers

of assumptions which are considered in the PPP theory. While this is the essence of the theory
that most of the assumptions that are made in the theory are unrealistic and the impractical.
Hence the brief description for the same is necessary for the country so as to make them helpful
in understanding how the theory helps in analyzing the effect in the real world situation.
 It is based on the general employment rate which specifies that the employment rate in
the two countries are considered to be the same which is not at all acceptable as this is
always different. Hence this is seen that assumptions are impractical and are considered
to be unrealistic.
 While as per the demand and the supply rule this is seen that the price of the different
commodities in the domestic market is based on the demand and supply of such
commodities. However, this is considered that demand and the supply aspects of the
products and commodities are overlooked through the demand and price of the products
and commodities of the country.
Hence this is considered that the above assumptions are considered to be impractical and
unrealistic where it would be considered that the exchange rate of the country is considered to be
in the conformity with the PPP theory.
Also, the International fisher effects theory, on the other hand, does not recognize the importance
of the macro and the microeconomic factors. These factors include the inflation levels, economic
level, employment status and the general level of the country.
Therefore this is seen that both the theory has a failure in understanding the importance and
explaining the exchange rates between the two different countries. While this is important to say
that both the concepts are considered to be dependent on the various theories and assumptions
which are considered to be empirical for this purpose. While in the case of PPP it was not
possible to define the exchange rate between the two countries. The use of the derivatives also
helps in providing certainty so as to understand the exchange rates between the two currencies
through using the variations in the value of the assets or the commodity. It is considered as the
fact that derivatives derive the value form the assets and the commodities which are often lying
with the economists. This is considered that the value of derivative only change if there is a
change in the value of the underlying assets or the commodity. Hence this is seen that the theory
is not able to provide the relevant certainty with regard to the exchange rate and the use of the

derivative would be considered significantly to provide certainty to the value of the derivative
which is based on the underlying assets or commodities.
It is considered that the chances of the IFE theory to fail to provide the exchange rate is relatively
less as compared from the other theory which is based on the concepts of the general interest
rates in the country. It is considered that general interest rates in the country do not affect the
general inflation level of the country. It is seen that a higher rate of the interest rate in the country
would be considered to be supplemented by the higher rate of inflation to the depreciation in the
value of the currency at a higher rate. With the contrast with the lower rate of the interest rate in
the country shall be completed by the use of the low-interest rate so as to reduce the rate of the
depreciation in the value of the currency. While the use of the derivative to derive the value is
considered to be more assured as it directly changes the value with the change in the underlying
value of the assets.

Conclusion
This is concluded from the above study that Purchasing power parity and the international fisher
effects are two theories which are considered for determining the concept of the exchange rate.
This is seen that both theories are based on the purchasing power and the nominal interest rates
of the different countries. This is seen that both the theories have the strength and the weakness
as well. Hence this is important so as to use the theories where the strength and the weakness of
the correctly predicting the exchange rate with the different countries are specified.