In a crisis situation, does the Fund call for currency depreciation, tight monetary policy, and high interest rates?
A. During the type of crises that the IMF is called to address, countries typically face a loss of investor confidence that results in large sales of domestic assets including, quite often, the domestic currency. This is also called capital flight. The public fear is that the crisis will result in high inflation and/or debt defaults. It is because of these risks that interest rates and the demand for foreign currency increase. A prudent monetary policy and other confidence-building measures are needed to help contain the run on the domestic currency and on domestic assets by curtailing inflation expectations and raising interest rates, thus preventing a disruptive situation with a free falling exchange rate and rampant inflation. However, as confidence improves and capital flows back into the country this eventually allows for lower interest rates again.
