International Financial Instability in a World of Currencies Hierarchy

Andrea Terzi

No ief0064, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: The 1990s have witnessed an increase of international financial turbulence. Indeed, the frequency, the size, the geographic extension, and the social costs of financial crises have made the topic a global policy issue. An array of policy actions have been advocated to prevent crises from happening again. A major controversial question is whether efforts should be directed towards national reforms in emerging markets or, rather, towards a new international design of international payments. After a critical review of the standing proposals, this paper contends that this debate has not yet fully explored one of the problems of international instability, that is to say, the problem raised by international payments in a world of currencies of diverse quality. As Keynes firmly contended, the monetary side of the (global) economy is not a neutral factor. In fact, it may be the problems posed by the different degrees of “international moneyness” that make currencies unequal that should be considered as one of the fundamental factors behind any model of international financial instability. Viewed in this light, a major re-design of international payments systems is warranted, and options seem limited to either world dollarization or the ‘bancor’ solution. Recent reformulations of Keynes’s original ‘bancor’ proposal seem to be a more viable alternative to either the status quo or world dollarization.

Keywords: Currency hierarchy; Currency crises; Banking crises; Capital flows; International monetary arrangements and institutions. (search for similar items in EconPapers)
JEL-codes: F02 F33 F34 G15 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published in Louis-Philippe Rochon and Sergio Rossi (eds.), Monetary and Exchange Rate Systems: A Global View of Financial Crises, Edward Elgar, 2006.

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