The IMF and Institutional Reform in Ireland

The IMF report highlights two areas for institutional reform.  This is important, since institutional reform can be helpful not only in resolving the current crisis but also in preventing future crises. In particular, the IMF report advocates:

1.  A special bank resolution regime. “Such a regime would recognize the unique role played by banks in the economy and give the authorities the power to quickly transfer assets and deposits to another institution (a purchase-and-assumption transaction) or to establish a bridge bank (a new limited life bank into which the old bank is transferred to facilitate its sale).”

2. A statutory fiscal rule. “In this regard, a fiscal rule can create the basis of a public commitment to fiscal prudence. This would be valuable for navigating the ongoing politically-sensitive consolidation and maintaining long-term fiscal policy stability. In the context of the European Union’s Stability and Growth Pact, a statutory commitment to a medium-term objective of close to structural balance would be appropriate. This would need to be supported by a medium-term expenditure framework that outlines a detailed time path of expenditure reductions. Transparency and mechanisms to ensure the review of these objectives would limit the risk that they are diluted. While the authorities were supportive of such a rules-based framework, they were less sure of how quickly it could be implemented.”