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The international monetary and financial system: its Achilles heel and what to do about it

Claudio Borio ()

No 203, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the ?excess financial elasticity? of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets ? the ?excess saving? and ?excess demand for safe assets? views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.

JEL-codes: E40 E43 E44 E50 E52 F30 F40 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014-10-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:203

DOI: 10.24149/gwp203

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