Abstract
Under the International Monetary Fund (IMF)’s recently developed pragmatic response, the amount a member can borrow is not determined by its quota. We consider two pragmatic responses that produce a Pareto improvement, compared with the IMF rule: one mandated by the IMF and the other related to the trade of the additional credit limit in the market. Both these responses indicate that the additional credit limit on top of the IMF rule should be positive (negative) for a country whose investment return is larger (smaller) than the average investment return across all IMF member developing countries. The rule for the IMF credit limit does not reflect the demand for credit, which induces inefficiency. The first pragmatic response, which has an appropriately small negotiation and distribution cost per unit incurred by the IMF, may dominate the second one.
Acknowledgements
I am very grateful for the comments from two anonymous referees and Osamu Kamoike, Ghatak Subrata and Mohamed Aslam.
Notes
1 If developing countries are under-represented, we would expect to find that they have a lower share of the IMF’s quotas than their share of the world economy. Rapkin and Strand (Citation2005, Tables 1–5) find that developing countries are over- rather than under-represented by the current quotas when they use variables similar to those used by the IMF. Officer (Citation1991) derives the same result for the 1980s as Rapkin and Strand using a different measure (the quota/income ratio). Since 2011, the new quota formula is a weighted average of GDP (weight of 50%), openness (30%), economic variability (15%) and international reserves (5%).
2 Morris and Shin (Citation2006) develop a model of IMF operations, focusing on catalytic finance through IMF lending: the existence of IMF assistance provides a lifeline for the debtor country, which alters the incentives for private sector creditors just enough to make them roll over their maturing claims. Döbeli and Vanini (Citation2004) also develop a model of IMF operations with lending that causes moral hazard on the debtor side, creditor side and both sides.
3 Note that there are variable constraints among the N countries:
4 Strictly speaking, the formulation for Equation 11 needs one more constraint: .
5 Strictly speaking, the formulation for Equation 19 needs one more constraint: . Then, we assume that the equilibrium
satisfies this condition.