The Asian Crisis and the IMF: New Problems, Old Solutions?

The IMF's policies for dealing with balance of payments disequilibria are based on theoretical models that emphasize the role of government policies that increase spending and lead to a deficit in the current account. The Fund, therefore, recommends reductions in fiscal deficits and a contractionary monetary policy to deal with balance of payments crises. However, the Asian crisis of 1997 took place because of financial speculation and short-term capital outflows, and the IMF was criticized for recommending inappropriate policies. Since the Asian crisis, a number of proposals have been advanced to prevent or mitigate such crises. These include increased regulation of domestic financial markets, controls on international capital flows, new institutional facilities and enhanced lending capabilities for the IMF. JEL Classification: F3