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 12: The great wall of the Chinese renminbi (1994-2005)

Fabrizio Saccomanni


12. The great wall of the Chinese renminbi (1994–2005) Evidence of currency manipulation has become increasingly obvious during the 2003–05 period. The leading case in point is China. Morris Goldstein (2006, p. 145) Some advisors have prescribed the ‘shock therapy’ to Russia and Eastern European countries, but later on this was described as ‘shock with no therapy’. We should be cautious to offer the same prescription again, so as not to have credibility jeopardized. China will only consider to take the gradualist reform approach that wins the trust of the masses of the Chinese people, rather than a ‘shock’, not to mention that the United States has not taken the lead to use ‘shock’ to adjust its imbalances. Zhou Xiaochuan (2006, p. 2) The exchange rate policy of the People’s Republic of China was not the subject of close attention by the international community until the beginning of the third millennium, when it became clear that the extraordinary and sustained growth performance of China was having major repercussions on the world economy, global payments imbalances and exchange rate relationships among key currencies. In fact, until the 1970s China was seen as the gigantic but poor developing country it was, with an annual per capita income of $200 in 1978 (see Bergsten et al. 2006, p. 5). It was also a communist country that had gone through a period of severe political and social instability during the ‘cultural revolution’ of 1966–69 (with devastating implications for the domestic...

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