The current system of exchange rates is an obstacle to effective international cooperation on imbalances, US Treasury Secretary Timothy Geithner said in his address to the Spring Meeting of the International Monetary Fund here last evening.
"On the one hand, most advanced and emerging market economies operate largely flexible exchange rate regimes with open capital accounts. On the other, a few emerging markets run tightly managed currency regimes, deploying extensive capital controls and accumulating excess reserves well beyond precautionary levels," Geithner said.
"This asymmetry magnifies capital flows into emerging markets with open capital accounts, heightening upward pressure on exchange rates that are flexible and fueling inflation in economies with managed, undervalued exchange rates," he said.
Facilitating rebalancing requires broad consensus that major economies advanced and emerging need to allow their exchange rates to adjust in response to market forces, the Treasury Secretary said.
Geithner said the IMF also needs to take a stronger role in fulfilling its surveillance responsibilities with regard to exchange rates, reserve accumulation and capital flows.
"The IMF has the capacity and responsibility to play a critical role in solving this problem and should do so by significantly strengthening its surveillance. The Fund has the requisite tools within the existing framework of the IMF Articles of Agreement but they have not been sufficiently utilised, as suggested by the IMF's Independent Evaluation Office," he said.
"Stepped-up surveillance should include greater independence to publish IMF analysis, such as the Fund's estimates of equilibrium exchange rates, recommendations for how to preempt the emergence of large imbalances, and advice on the appropriate use of prudential tools," he said, adding the Fund's recently proposed framework to provide coherent and transparent advice to members on managing capital inflows is a good start.
Referring to the IMF projections that the global economy will grow at about four and a half per cent in 2011, he, however, said, the world still faces very significant economic policy challenges.