What Is International Monetary Fund?

An integral part of the Breton Woods system was the establishment of the International Monetary Fund, which still administers the international monetary system and operates as a central bank for central banks. Member nations subscribe by lending their currencies to the International Monetary Fund; the International Monetary Fund then relents these funds to help countries in balance of payments difficulties. In recent years, the International Monetary Fund has played a key role in organizing a cooperative response to the international debt crisis and in helping formerly communist countries make the transition to the market.

How would the International Monetary Fund accomplish this objective? Suppose for example, that Russia's transition to the market is in trouble because of a rapid inflation and an inability to raise funds in private markets. The country is having trouble paying interest and principal on its foreign loans. The International Monetary Fund might send a team of specialists to pore over the country's books. The International Monetary Fund team would come up with an austerity plan for Russia, generally involve reducing the budget deficit and tightening credit; these measures would slow inflation and increase confidence in the Russian ruble.