Chapter 3: The future of the international monetary system: how long is the long run?
John Murray1 INTRODUCTION The world is getting smaller in the sense that the global economy is becoming ever more integrated and interconnected. Goods, services, capital and labor all ﬂow more freely; and developments in any one region – whether good or bad – are more likely to inﬂuence activity elsewhere. The implications of this integrative process for the near-term evolution of the international monetary system have been the subject of considerable debate and disagreement. Many economists, however, have suggested that the long-run consequences are clear. Eventually the global economy will operate much like a traditional national economy – with a single universal currency, a single monetary authority, and a single (integrated) ﬁnancial market. How one gets to this centralized state is less obvious.2 Fischer (2000) has noted that the transformation of the international monetary system will likely involve an intermediate step, in which the number of currencies in the world economy initially expands, after which the international monetary system will begin to shrink, until eventually only a single currency remains. Centrifugal forces will dominate in the short term, but centripetal forces will subsequently gain the upper hand, and the system will begin to collapse – much like the physical universe. At some point, in other words, economic gravity will take hold and the global economy will condense to a single integrated system. Many observers believe that the gradual disappearance of national currencies will be matched by a similar concentration of international capital markets and the emergence of a single monetary/supervisory authority for the...
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