Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 3: Monetary and financial authorities

Fabrizio Saccomanni


Monetary and financial stability constitutes a shared objective that is pursued jointly by the authorities of each country, but with a clear separation of roles and instruments. ‘Monetary stability’ implies the absence of inflation or deflation in the prices of goods and services. In the majority of countries the responsibility for ensuring monetary stability is entrusted to the central bank, which conducts monetary policy accordingly. Price stability can also be pursued by means of administrative controls managed directly by government authorities, but these instruments generally prove ineffective in the medium term and provoke severe distortions in the functioning of the economic system and in the allocation of resources. In fact, price controls are typical of planned economic systems and have only been used by market economy countries in exceptional circumstances (for instance in wartime or after an oil price shock). The pursuit of monetary stability also depends on a country’s general macroeconomic situation, for which government authorities are responsible through the setting of budgetary and income policies. ‘Financial stability’, on the other hand, implies the absence both of significant movements in the price of financial assets and of crises impairing the solvency of institutions operating on the banking and financial intermediation markets (or, put differently, that affect the nominal value of the assets entrusted to these intermediaries by their clients). The movements and crises that the authorities are expected to prevent are those that have significance for the stability of the financial system...

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