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 13: How did they do it?

Fabrizio Saccomanni


My sense is that, at the end of the day, we will find success easier than feared by so many – that the market will more often than not respond constructively to a firm and intelligent lead by governments and exchange rate stability will reinforce prospects for growth. One thing is for sure: without trying, we will never know. Paul Volcker (1995, p. 8) If monetary authorities have succeeded in exerting significant and lasting influence over the behaviour of the global foreign exchange market, it is important to identify clearly the factors in the episodes examined that induced market participants to modify their risk–return assessments and their expectations about the evolution of exchange rates. This exercise does not aim to identify the existence of a clear cause and effect relationship between a specific policy action (be it a change in interest rates, a foreign exchange intervention or a declaration) and a specific exchange rate movement. Strategies for influencing the foreign exchange market typically comprise a complex set of policy actions that are rarely predetermined and whose implementation is decided on an ad hoc basis in relation to market performance. They may also be modified in the light of the results obtained and are carried out according to procedures agreed anew on each occasion with reference to domestic political processes or in the framework of international coordination. Still, the survey conducted provides indications concerning the conditions that have to be met in devising a...

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