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 6: In Search of International Monetary and Financial Stability

Fabrizio Saccomanni

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6. In search of international monetary and financial stability However compelling the argument that global financial markets require a global financial regulator, global bankruptcy court, global money and a global central bank, realism requires acknowledging that national governments are not prepared to turn over significant additional powers to a super-IMF. Barry Eichengreen (1999b, p. 3) Reforming the international financial architecture without reforming the currency regime is like watching Hamlet without the Prince [of Denmark]. The international monetary system will continue to be ineffective and crisis prone until that crucial centrepiece of its operation is thoroughly revamped. Goldstein Report (1999, p. 129)1 The perception that the IMF is asleep at the wheel on its most fundamental responsibility – exchange rate surveillance – is very unhealthy for the institution and the international monetary system. Timothy D. Adams (2006, p. 135) The IMF is in eclipse as the pre-eminent institution of international financial cooperation. Consequently, the world is worse off. Despite the considerable reforms during the past decade, more should be done. Edwin Truman (2006, p. 119) 6.1 COPING WITH CRISES The reaction of the international community to the various episodes of instability that have periodically shaken the international monetary and financial system has on the whole been characterized by partial responses and ad hoc interventions, at least until the 1990s. Towards the end of the second millennium, the need for a more systematic and comprehensive approach to global financial instability was increasingly recognized due to the growing number of crises and...

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