Evolution of International Monetary System

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The Evolution of the International Monetary System In response to the worst financial crisis since the 1930s, policy-makers around the globe are providing unprecedented stimulus to support economic recovery and are pursuing a radical set of reforms to build a more resilient financial system. However, even this heavy agenda may not ensure strong, sustainable, and balanced growth over the medium term. We must also consider whether to reform the basic framework that underpins global commerce: the international monetary system. My purpose this evening is to help focus the current debate. While there were many causes of the crisis, its intensity and scope reflected unprecedented disequilibria. Large and unsustainable current account…show more content…
This is because the only limit on reserve accumulation is its ultimate impact on domestic prices. Depending on the openness of the financial system and the degree of sterilization, this can be delayed for a very long time.2 In contrast, deficit countries must either deflate or run down reserves. Flexible exchange rates prevent many of these problems by providing less costly and more symmetric adjustment. Relative wages and prices can adjust quickly to shocks through nominal exchange rate movements in order to restore external balance. When the exchange rate floats and there is a liquid foreign exchange market, reserve holdings are seldom required.3 Most fundamentally, floating exchange rates overcome the seemingly innate tendency of countries to delay adjustment. A brief review of how the different international monetary regimes failed to manage this trade-off between nominal stability and timely adjustment provides important insights for current challenges. The Evolution of the International Monetary System The Gold Standard Under the classical gold standard, from 1870 to 1914, the international monetary system was largely decentralized and market-based. There was minimal institutional support, apart from the joint commitment of the major economies to maintain the gold price of their currencies. Although the adjustment to external imbalances should, in theory, have been relatively smooth, in practice it was not problem-free.4 Surplus countries
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