The International Monetary System

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O C C A S I O N A L PA P E R S E R I E S
N O 1 2 3 / F E B R UA RY 2 011

THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS

by Ettore Dorrucci and Julie McKay

OCCASIONAL PAPER SERIES
NO 123 / FEBRUARY 2011

THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS

by Ettore Dorrucci and Julie McKay1
NOTE: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. In 2011 all ECB publications feature a motif taken from the €100 banknote.

This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science Research Network electronic library at http://ssrn.com/abstract_id=1646277

1 European Central Bank, Ettore.Dorrucci@ecb.europa.eu, Julie.McKay@ecb.europa.eu. The views expressed in this paper do not necessarily reflect those of the European Central Bank. The authors would like to thank, outside their institution, A. Afota, C. Borio, M. Committeri, B. Eichengreen, A. Erce, A. Gastaud, P. L'Hotelleire-Fallois Armas, P. Moreno, P. Sedlacek, Z. Szalai, I. Visco and J-P. Yanitch, and, within their institution, R. Beck, T. Bracke, A. Chudik, A. Mehl, E. Mileva, F. Moss, G. Pineau, F. Ramon-Ballester, L. Stracca, R. Straub, and C. Thimann for their very helpful comments and/or inputs.

© European Central Bank, 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Internet http://www.ecb.europa.eu Fax +49 69 1344 6000 All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors. Information on all of the papers published in the ECB Occasional Paper Series can be found on the ECB’s website, http://www.ecb.europa.eu/pub/ scientific/ops/date/html/index.en.html. Unless otherwise indicated, hard copies can be obtained or subscribed to free of charge, stock permitting, by contacting info@ecb.europa.eu ISSN 1607-1484 (print) ISSN 1725-6534 (online)

CONTENTS
ABSTRACT EXECUTIVE SUMMARY INTRODUCTION 1 THE LINK BETWEEN THE CURRENT INTERNATIONAL MONETARY SYSTEM AND GLOBAL MACROECONOMIC AND FINANCIAL STABILITY 1.1 The contours of the international monetary system 1.1.1 A suggested definition of an international monetary system 1.1.2 The current international monetary system in comparison with past systems 1.2 The debate on the role played by the international monetary system in the global financial crisis 1.2.1 Overview 1.2.2 The recent literature on the US dollar, the “exorbitant privilege” and the Triffin dilemma 1.2.3 Savings glut and real imbalances 1.2.4 The liquidity glut, financial imbalances and excess elasticity of the international monetary system during the “Great Moderation” 1.2.5 The implications of uneven financial globalisation 2 AFTER THE CRISIS: HOW TO SUPPORT A MORE STABLE INTERNATIONAL MONETARY SYSTEM 2.1 Addressing vulnerabilities related to the supply of international currencies 2.1.1 Towards a truly multipolar currency system? 2.1.2 Towards a global currency system with elements of supranationality? 4 5 8 2.2 Addressing vulnerabilities affecting the precautionary demand for international currencies 2.2.1 Measures to address external shocks resulting in the drying up of international liquidity and sudden stops in capital inflows 2.2.2 Creating disincentives to national reserve accumulation for precautionary purposes 2.3 Improving the oversight of the system: risk identification and traction 2.3.1 Improving oversight: towards better risk identification 2.3.2 Improving oversight: towards greater “traction” 2.4 Longer-term market developments shaping the international monetary system REFERENCES

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