Chapter 10: Exchange Rate Regimes and the Need for Elements for a New International Financial Architecture
Stephany Griffith-Jones INTRODUCTION The recent wave of currency and banking crises that began in East Asia, then spread to many other emerging markets (as described in depth in previous chapters), and even threatened briefly to spill over to the USA in the wake of Russia and Long-term Capital Management (LTCM) – generated a broad consensus that fundamental reforms were required in the international financial system. More recent crises, as in Brazil, as well as critical situations in Turkey and Argentina, reiterate the need for additional changes in the eyes of many observers. Existing institutions and arrangements were widely seen as inadequate for dealing with very large and extremely volatile capital flows, in which an important part of the volatility was caused by large imperfections in the financial markets themselves. The seriousness of the situation is underlined by the fact that in the 1990s, during 40 out of 120 months, (that is 33 per cent of the time) there were important crises. This is particularly problematic for two reasons. Firstly, currency and banking crises – which have recently occurred mainly in emerging markets – have extremely high development and social costs. Indeed, deep and frequent crises in developing countries could undermine achievement of the UN target to halve world poverty by 2015. Secondly, there is always the very small – but totally unacceptable – risk that contagion and spillovers in an increasingly interdependent international financial system could lead to global problems. Both these problems implied that urgent action was required to overcome the risk that the...
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