Dow Jones Newswires
October 2, 1998
Washington -- A split emerged Friday between the World Bank and the International Monetary Fund (IMF) over the appropriate monetary policy response that should be followed by countries that are swept up in the financial maelstrom that is swirling around the globe.
On Wednesday, the IMF's chief economist Michael Mussa stood by the Fund's view that countries whose currencies come under severe downward pressure should raise interest rates to prop up their currency and to slow the outflow of capital when this occurs. But Joseph Stiglitz, chief economist of the IMF's sister organization, the World Bank, told journalists on Friday that he favors a policy approach that is diametrically opposed to that put forward by Mussa.
In remarks to a press conference on Wednesday, Mussa said that in a country whose currency is "very enormously depreciated" by market pressures and where domestic banks and businesses have a high degree of foreign currency indebtedness, "monetary conditions have to be firmed at least moderately in order to resist overwhelming depreciation."
Mussa noted that higher interest rates in Thailand and Korea had helped to stabilize the situation in these countries even though the monetary tightening had been "somewhat tardy." He observed that interest rates have come down again in these countries, and in Korea's case to below the levels prevailing prior to the crisis. In Indonesia, where monetary conditions weren't really tightened, Mussa said, there was "a disaster" in which the exchange rate depreciated "out of sight."
Mussa observed that "I think those who argue that monetary policy should have been eased rather than tightened in those economies are smoking something that is not entirely legal."
Stiglitz from the World Bank observed wryly that "I didn't inhale; I wasn't even smoking." He said that in his view, Mussa "hasn't looked at the econometric evidence of this."
"Looking at this approach not from an ideological perspective but looking at it from the way anyone who is serious about economics would look at it, looking at the data sets, we go through both the theory and the evidence. on the issue and you'll see that Mr. Mussa is wrong," Stiglitz said.
FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
