Tim Adams – the new US Treasury Under Secretary – thinks so:
IMF Article IV requires that the IMF exercise "firm surveillance" over the exchange rate policies of members. After the collapse of the Bretton Woods fixed exchange rate system, the IMF in 1977 developed surveillance guidelines that determine its approach to what is still called the "Article IV" process. Those guidelines included domestic policies, since domestic policies can impact a country's balance of payments position.
Over time, however, domestic policies have come to dominate Article IV reviews, and it is not uncommon to read an Article IV review with only a brief reference to a member's exchange rate policy and its consistency with both domestic policies and the international system. There is almost never discussion of whether an alternative regime could be more appropriate or how to transition to it.
Many large emerging-market countries would benefit from regimes that allow substantial exchange rate flexibility. Research, including by the IMF, has shown that for developing countries integrating into international capital markets, the requirements for sustaining pegged exchange rate regimes have become very demanding.
The IMF also has standing authority to initiate "special consultations" whenever one member's exchange rate policy is having an important impact on another member. However, in over a quarter century, the IMF has held special consultations exactly twice. This has placed increased pressure on bilateral mechanisms and actions to address instances of protracted currency misalignment.
We understand that tough exchange rate surveillance is politically difficult for the IMF. It is also true that a country has the right to determine its own exchange rate regime. Nevertheless, the perception that the IMF is asleep at the wheel on its most fundamental responsibilityâ€”exchange rate surveillanceâ€”is very unhealthy for the institution and the international monetary system. (emphasis added)
I am not exactly a fan of the Bush Administration's economic policy, but on this, I agree with Tim Adams and the Treasury. The IMF did not call out countries with overvalued exchange rates in the 1990s — in 2000 and 2001, with the support of the US, it even financed a country with an overvalued exchange rate. And it has refused to call out countries that are engaging in massive, sustained intervention to maintain undervalued exchange rates now.