International Finance, IMF, and World Bank

Question 1

When were the IMF and World Bank founded and where/at what conference?

Answer 1

1944 at the Bretton Woods Conference, ratified in 1945.

Question 2

What is the IMF’s mandate?

Answer 2

To ensure the stability of the international monetary system by offering technical assistance and loans to avoid crises in balance of payments.

Question 3

What part of the IMF mandate is now obsolete and why?

Answer 3

control over exchange rates. Many countries switched to market driven exchange rates

Question 4

The IMF and World Bank have how many members and are headquartered where?

Answer 4

189, Washington DC.

Question 5

The IMF and World Bank have what kind of voting structure?

Answer 5

Weighted voting structure by contribution size

Question 6

What are the key Obligations of IMF members?

Answer 6

• Collaborate with the fund and other members to ensure orderly exchange arrangements
• Avoid manipulating exchange rates
  -Accept fund surveillance over the exchange rate policies of members
  -provide fund with information necessary for surveillance
  -the fund shall oversee the international Monetary system to ensure its effective operation

Question 7

IMF key structure

Answer 7

Aggregated pool of IMF member funds temporarily made available to members as a lender of last resort

Question 8

2011 Greek Bailout

Answer 8

Biggest financial bailout in global history. Greece was bailed out by the IMF because of massive trade and budget deficits. IMF organized loans from the richest IMF countries as part of the “Troika” with the EU and ECB.

Question 9

Compliance with IMF loans

Answer 9

Agreements include: Amount, expected repayment date, criteria to judge countries’ performance. Loans typically given in tranches, and countries must agree to change their policies.

Question 10

When do IMF countries get loans?

Answer 10

Distress loans are limited to situations when an IMF member has a balance-of-payment problem.

Question 11

IMF Enforcement

Answer 11

Low level of enforcement. IMF enforcement comes from its control over future resources. IMF often grants waivers for noncompliant loans,

Question 12

World Bank Mandate

Answer 12

To reduce poverty by lending money of the rich countries to the poor countries for specific development projects, and by providing technical assistance to poor countries

Question 13

World Bank Key Structures

Answer 13

• $275 Billion aggregated pool of from members
• $60 Billion in loans and credits
  -Issues bonds backed by capital in order to raise money for lending

Question 14

What organizations are in the “World Bank Group?

Answer 14

International Bank of Reconstruction and Development (IBRD) commonly known as the World Bank, International Financial Corporation (IFC), International Development Agency (IDA)

Question 15

Obligations of the World Bank

Answer 15

Each member state will subscribe to shares of the capital stock of the bank, Resources shall be used exclusively by the members for both development and reconstruction, members will deal with the bank through its fiscal agencies, Each member has 250 votes plus one additional vote per share of stock,

Question 16

How does the world bank lend?

Answer 16

It raises capital for lending by borrowing from commercial institutions with the credit of its members as collateral. Because of its low default risk it can borrow money cheaply and lend at low interest rates.

Question 17

Compliance with the World Bank

Answer 17

Project-specific-lending to countries, can lend to private actors with guaranteed state backing

Question 18

World Bank Enforcement

Answer 18

Relies on states’ concerns with their future borrowing as the lever to induce loan repayment. No enforcement mechanism in agreements.

Question 19

Why do Governments Manage Money?

Answer 19

1). Use Monetary Policy to stabilize the economy
2). Make the country open to international financial flows
3).Maintain exchange rate stability

Question 20

How do Governments use Monetary Policy to stabilize the Economy?

Answer 20

Reduce the intensity of economic cycles by increasing interest rates to reduce money supply and slow growth, and lower interest rates to increase money supply and stimulate growth

Question 21

What is the benefit of allowing money to flow freely across national boarders?

Answer 21

Citizens can invest abroad, foreign investors can bring resources and expertise, Intigrated financial markets produce economic efficiencies

Question 22

Why is it important to maintain exchange rates?

Answer 22

Big swings in exchange rate cause economic volatility. hard on citizens.

Question 23

What is the “Trilemma of International Finance?”

Answer 23

Governments cannot simultaneously Use Monetary Policy to stabilize the economy, Make the country open to international financial flows and control exchange rates. Can only get two of three major policy goals. ex. EU uses the ECB to deal with the trilema, many smaller countries peg their currency to USD. etc.

Question 24

Cooperation Problems of International Finance

Answer 24

The Trilema

Question 25

What was the Bretton Woods conference?

Answer 25

1944 conference in Bretton Woods, NH that created the IMF and World Bank (IBRD)

Question 26

What is a Balance-of-Payment Deficit?

Answer 26

Balance-of-Payment deficits occur when a country sends more $ to foreigners than foreigners send to it ie. a country imports more than it exports, which leads to currency devaluation