The IMF’s Surveillance Failure

One of the key tasks of the International Monetary Fund (IMF) is to monitor member countries’ economic and financial policies and provide them with sound economic policy advice. This activity is known as surveillance.

It would be a gross understatement to say that the IMF failed miserably in this task last year, particularly in the United States, the IMF’s largest member country. Despite all the warning signs, it managed not to sound the alarm about the inflationary dangers that lay ahead due to irresponsibly loose fiscal and monetary policies. Unchastised by this experience, the IMF now looks like it is failing in the opposite direction. It is doing so by cheerleading central banks on the need for high-interest rates for longer. Never mind that the world economy is slowing, long-term bond yields are spiking, and cracks are appearing in the global financial system.

In March 2021, the Biden administration secured passage of its $1.9 trillion American Rescue Plan to support the economy. Added to the previous year’s COVID budget stimulus packages, the Biden stimulus implied that the economy would receive cumulative budget support equivalent to a staggering 20 percent of GDP. Yet unlike former Treasury Secretary Larry Summers, who characterized this budget policy as the least responsible fiscal policy in the past forty years, the IMF was disappointingly silent in voicing criticism.

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