Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Chapter 6: The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma
6. The financial crisis, rethinking of the global financial architecture and the trilemma Joshua Aizenman, Menzie D. Chinn and Hiro Ito 6.1 INTRODUCTION The global financial crisis that began in 2008 in the United States (US), but spread far and wide, had dire consequences for economic growth. While the extent of economic damage varied across countries, economists agree that the downturn was the worst since the Great Depression. Just as the traumas of the Great Depression and World War II underpinned an initiative to set up a stable international financial architecture, the global financial crisis sparked a call for action. That action began with the November 2008 meeting of the Group of 20 (G20) that took place in the midst of the financial panic. As the G20 countries discussed the following year in Pittsburgh, it seemed that the time was ripe for a comprehensive re-evaluation of the international financial architecture – one that would probably be accompanied by changes in the macroeconomic policy combinations adopted by countries. Whatever configuration of international financial architecture world leaders consider, they cannot avoid confronting the central policy trilemma in international finance, the existence of the ‘impossible trinity’. The trilemma thesis states that a country simultaneously may choose any two, but not all, of the following three goals: monetary independence, exchange rate stability and financial integration. A number of different international monetary and financial arrangements have been in place since the gold standard system. Each set of arrangements imposed different choices on countries. The Bretton Woods...
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