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 14: The golden mean

Fabrizio Saccomanni


Auream quisquis mediocritatem diligit, tutus caret obsoleti sordibus tecti, caret individenda sobrius aula.* Horace (Odes, II, 10) There is a tide in the affairs of men, Which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat; and we must take the current when it serves, or lose our ventures. William Shakespeare (Julius Caesar, Act IV, Scene 3) 14.1 HAVE THE TIGERS BEEN TAMED? The conclusion I have drawn from the critical rereading of the history of financial globalization outlined in the previous chapters is that a key factor in the episodes of monetary and financial instability that have occurred since the mid-1980s has been the interaction between the monetary policies of the leading countries and the working of global financial markets. A central role in this interaction has been played by the exchange rate policies pursued both by the major industrial countries and by emerging market economies. I have also argued that the responses by governments and international financial institutions to the challenges posed by globalization have been either too narrowly focused when designed to be quickly implemented, or effective only in the long-run when conceived on a global scale. Substantial financial assistance has been granted to countries affected by crises and, from time to time, concerted strategies have been adopted to correct exchange rate misalignments. On a macroeconomic level, countries have been lectured...

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