The future of the IMF

the long version

Capital flows to emerging markets remain highly volatile. This has enormous economic and social costs for developing economies. Most of the proposals to reform the international financial architecture and the IMF in particular are aimed at dealing with the most extreme cases of crises - run-like crises and bankruptcy. While this is good, it leaves unaddressed a significant fraction of the costs associated to capital flow reversals. Many countries experience deep contractions but no open crises, and many of the countries that end up in extreme crises go first through a prolonged period of sharply reduced access to international capital markets. To deal with these situations, the paper proposes a market solution: The creation of hedging and insurance markets against capital flow volatility. The role of the IMF and other IFIs in this context is to facilitate the creation and functioning of these markets, and supervise/advise countries on the management of fiscal, monetary, and liquidity-requirement policies in this mega-insurance context. Keywords: Capital Flows, Crises, Hedging, Insurance, Contingent Markets, Contractible and Noncontractible Shocks, Contingent-market and Crises Department, IMF, IFIs, Contingent-EM-CDO, Fiscal and Monetary Rules. JEL Classifications: E0, E5, D6, F0, F3, G1, G2, O2.