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This bank has a history of addressing issues that relate to the safety and soundness of the financial system and, in particular, questions relating to the financial system's safety net. Beginning with research in the 1970s and continuing with our Annual Reports of 1988 and 1997, we have analyzed the implications of broad-based deposit insurance programs and offered solutions that address the attendant problem of moral hazard. But we have also looked beyond our borders and considered international issues that require a coordinated response, as in our Annual Report of 1989 and its proposal for fixed exchange rates. This year's Annual Report essay is an extension of those efforts. The current debate about the proper role of the International Monetary Fund (IMF) has focused, in large part, on whether the IMF should serve as a lender of last resort, that is, on whether the IMF should provide an international safety net based on a domestic model. The authors of this year's essay, V.V. Chari and Pat Kehoe, argue that the domestic model many have in mind is not appropriate for the IMF, but they also show that this debate misses a more fundamental point: The issue is not so much what the IMF should do, but what needs to be done and who can best do the job. In other words-to borrow from the essay title-before we determine a role for the IMF or any other international institution, we need to ask the right questions. In the end, whether you agree with the authors' conclusions about the role of the IMF, we think it important that you at least consider their framework for assessing the need for a coordinated international response. For if we don't ask the right questions—it almost goes without saying—we can hardly be expected to come to the right policy prescriptions. —Gary
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Glossary
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Annual Report
