DP1414 | The Use of SDRs in the Financing of Official Safety-net Mechanisms

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The question addressed in this paper is whether the IMF should be involved in Mexico-style crises and, if the answer is positive, whether the existing IMF financing mechanisms are adequate ? both in terms of the volume of funds that can be mobilized and the speed at which they can be mobilized ? to support the crisis-management role that the Fund would play. The paper outlines a plan that satisfies three characteristics: (i) speed, because crisis intervention cannot wait; (ii) risk redistribution, because speed will always come at the cost of higher risk, and this needs to be redistributed across lending countries, and the justification for IMF intervention lies in the ability of this institution, compared with international agencies, to redistribute risk across a large number of potential lenders; (iii) temporary creation of liquidity, because a mechanism designed for crisis management should not produce a permanent increase in international liquidity.