The notion that countries should reduce interest rates-rather than raise them-to fend off debt and exchange-rate crises is even more absurd. When investors fear a country is increasingly likely to default on its debts, they will demand higher interest rates to compensate for that risk not lower ones and when a nation 's citizens lose confidence in their own currency, they will require a large premium to accept debt denominated in that currency or to keep their deposits in domestic banks. No surprise that interest rates in virtually all countries that experienced debt crises during the last decade--from Mexico to Turkey--skyrocketed even though their currencies were allowed to float against the dollar The debate over how far interest rates should be allowed to rise in defending against a speculative currency attack is a legitimate one The higher interest rates go, the more stress on the economy and the more bankruptcies and bank failures; classic cases include Mexico in 1995 and South Korea in 1998. On the other hand. since most crisis countries have substantial "liability dollarization"that is, a lot of borrowing goes on in dollars--an excessively sharp fall in the exchange rate will also cause bankruptcies, with Indonesia in 1998 being but one example among many. Governments must strike a delicate balance in the short and medium term, as they decide how quickly to reduce interest rates from crisis levels. At the very least, critics of imf tactics must acknowledge these difficult trade-offs. The simplistic view that all can be solved by just adopting softer employment friendly" policies, such as low interest rates and fiscal expansions, is dangerous as well as naive in the face of financial Capital control Freaks Although currency crises and financial bailouts dominate media coverage of the IMF, much of the agency's routine work entails ongoing dialogue with the fund's 184 member countries. As part of the fund's surveillance efforts, IMF staffers regularly visit member states and meet with policymakers to discuss how best to achieve sustained economic growth and stable inflation rates. So, rather than judge the fund solely on how it copes with financial crises, critics should consider its ongoing advice in trying to help countries stay out of trouble. In this area, perhaps the most controversial issue is the fund's advice on liberalizing international capital movements-that is how fast emerging markets should pry open the protected domestic financial markets Critics such as Columbia University economist Jagdish Bhagwati have suggested that the IMF's zeal in promoting free capital flows around the world inadvertently planted the seeds of the Asian financial crisis. In principle, had banks and companies in Asia'sThe notion that countries should reduce interest rates—rather than raise them—to fend off debt and exchange-rate crises is even more absurd. When investors fear a country is increasingly likely to default on its debts, they will demand higher interest rates to compensate for that risk, not lower ones. And when a nation's citizens lose confidence in their own currency, they will require a large premium to accept debt denominated in that currency or to keep their deposits in domestic banks. No surprise that interest rates in virtually all countries that experienced debt crises during the last decade—from Mexico to Turkey—skyrocketed even though their currencies were allowed to float against the dollar. The debate over how far interest rates should be allowed to rise in defending against a speculative currency attack is a legitimate one. The higher interest rates go, the more stress on the economy and the more bankruptcies and bank failures; classic cases include Mexico in 1995 and South Korea in 1998. On the other hand, since most crisis countries have substantial "liability dollarization"—that is, a lot of borrowing goes on in dollars—an excessively sharp fall in the exchange rate will also cause bankruptcies, with Indonesia in 1998 being but one example among many. Governments must strike a delicate balance in the short and medium term, as they decide how quickly to reduce interest rates from crisis levels. At the very least, critics of IMF tactics must acknowledge these difficult trade-offs. The simplistic view that all can be solved by just adopting softer "employment friendly" policies, such as low interest rates and fiscal expansions, is dangerous as well as naive in the face of financial maelstrom. Capital Control Freaks Although currency crises and financial bailouts dominate media coverage of the IMF, much of the agency's routine work entails ongoing dialogue with the fund's 184 member countries. As part of the fund's surveillance efforts, IMF staffers regularly visit member states and meet with policymakers to discuss how best to achieve sustained economic growth and stable inflation rates. So, rather than judge the fund solely on how it copes with financial crises, critics should consider its ongoing advice in trying to help countries stay out of trouble. In this area, perhaps the most controversial issue is the fund's advice on liberalizing international capital movements—that is, on how fast emerging markets should pry open their often highly protected domestic financial markets. Critics such as Columbia University economist Jagdish Bhagwati have suggested that the IMF's zeal in promoting free capital flows around the world inadvertently planted the seeds of the Asian financial crisis. In principle, had banks and companies in Asia's