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 11: A safety net for the euro (2000)

Fabrizio Saccomanni


The circumstances in which the major countries would want to use intervention to attempt to influence exchange rates are relatively rare, but they do arise from time to time, and one would need to ask, ‘if not now, when?’ Michael Mussa (IMF 2000b, p. 336) During 2000 the downward trend of the euro exchange rate, already apparent in the new European currency’s first year of life, became even more pronounced. In addition to the economic factors already mentioned in Chapter 5, the euro’s performance began to be affected by the scepticism of market participants about the ability of the European monetary authority, the ECB, to counteract the declining exchange rate through monetary policy alone. Despite the fact that as early as November 1999 the ECB had begun to pursue a more restrictive monetary policy to prevent inflation from rising above 2 per cent, gradually increasing the main refinancing rate from 2.50 to 4.75 per cent in October 2000, the market believed that further monetary tightening aimed at supporting the exchange rate was unlikely. Inflationary tensions appeared to derive essentially from factors external to the euro area and were blamed primarily on a rise in oil prices. Yet the weakening of the euro exchange rate was itself a factor, as it induced capital outflows from Europe to the United States where investors were attracted by better profit prospects in the stock market and private sector. On this last point, there was broad consensus...

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