WHAT THE IMF REALLY PRESCRIBED FOR MALAYSIA In ''Malaysia could do worse than this economic plan'' (Economic Viewpoint, Nov. 2), Robert J. Barro first outlines what a typical central bank would like to be able to do when faced with a run on its currency--namely, sterilized intervention--to protect the economy from a loss in international reserves and money stock. He correctly points out that, ultimately, the central bank will come dangerously close to running out of reserves, and the currency will have to be devalued. He recommends instead that the central bank not sterilize and allow the money stock to decline. So far, so good. Barro mistakenly terms the International Monetary Fund's policy advice as one of ''sterilized intervention coupled with high interest rates.'' Economic theory will tell you that sterilized intervention (which aims to keep the money stock from falling) is fundamentally inconsistent with higher rates. The fact is that IMF-supported programs were originally formulated in an environment of plummeting exchange rates, rapid capital outflows, and shattered investor confidence. Interest rates had to be raised initially to stabilize exchange rates. In Barro's parlance, Fund-supported programs in fact called mostly for unsterilized intervention. Over the past few months, exchange rates have not only stabilized but have even begun to appreciate in many of the countries (including Malaysia), and some (notably Korea and Thailand) are rebuilding reserves. And in all cases, interest rates have come down and are now even lower than pre-crisis levels. The perplexing part comes when Barro recommends that Malaysia adopt a currency board and cavalierly states that Malaysia has sufficient reserves. A currency board would require that the authorities accept high interest rates to defend the exchange rate and the reserve position. Barro ignores the fact that the Malaysian authorities adopted their present strategy precisely to stimulate the economy by lowering interest rates without risking renewed capital outflows--clearly at odds with what would result from a currency board. Kalpana Kochhar Deputy Division Chief Asia and Pacific Dept. International Monetary Fund Washington

Updated Nov. 25, 1998 by bwwebmaster
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