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 4: The global market for foreign exchange

Fabrizio Saccomanni


The exchange rate is too important a price to be left wholly at the mercy of the exchange markets. Paul Krugman (1989, p. 100) The global foreign exchange market represents capitalism red in tooth and claw. This largely self-regulated trading system never sleeps and routinely transfers staggeringly vast sums of money around the world in seconds at the click of a mouse. In spite of its size and power the foreign exchange market has proved very adept at coping with change. It is immensely complicated but price transparency and intense competition ensure it operates on the tiniest of margins. Financial Times (2004) 4.1 A TRULY GLOBAL MARKET The global foreign exchange market is the nearest thing to a model of a perfect competitive market ever to have been achieved on a global scale, given the very large number of participants, efficient processes for determining and disseminating quotations, and secure trading and settlement procedures.1 Yet, it is only since 1989 that the scale and operation of global currency markets have been the subject of systematic research. Prior to that, only balance of payments statistics had been available on a country-bycountry basis, and these did not provide indications on the size of the foreign exchange market or its organization in terms of currencies and instruments. Following an initial sample survey conducted on the London, New York, Tokyo and Toronto exchanges, a broader survey was carried out under the aegis of the BIS in 1989. The sample size was then gradually extended...

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