What is the International Monetary System, and why does it need reforming?
February 10, 2011
"The international monetary system (IMS) is the set of rules and institutions that shape how international payments are handled. In particular, one of its key purposes is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and sustain the conditions necessary for global financial and economic stability. In addition, the system is intended to facilitate the orderly adjustment to shocks. The International Monetary Fund (IMF) was set up after World War II to promote international collaboration on international monetary issues. By becoming a member of the IMF, a country commits to certain obligations found in the IMF’s Articles of Agreement. Among these obligations are collaborating with the Fund and with other Fund members to promote a stable system of exchange rates and conducting exchange rate, and domestic economic and financial policies in a manner that is consistent with this objective. In particular, members undertake not to impose restrictions on the making of payments or transfers for current international transactions without the Fund’s approval, to eschew exchange rate policies that give an unfair trade advantage, to hold regular consultations on exchange rate, macroeconomic and financial policies with the IMF, and to provide the IMF with the data that it needs to carry out its responsibilities. For its part, the IMF is tasked with maintaining the stability of the IMS through firm surveillance.
The current system—one with de facto dollar dominance, wide discretion for countries to choose their exchange rate arrangements and international reserve policies, and broad but uneven capital mobility—has allowed countries to pursue domestic policy objectives while underpinning strong growth in global trade in recent decades. It has also proven robust; indeed, the dollar’s role as a safe haven was underscored in the recent crisis in spite of its origins in the United States . However, it has a number of well-known weaknesses, including the lack of an automatic and orderly mechanism for resolving the buildup of real and financial imbalances; volatile capital flows and exchange rates that can have deleterious economic effects; and related to the above, the rapid, unabated accumulation of international reserves, concentrated on a narrow supply. Addressing these problems is crucial to achieving the global public good of economic and financial stability, by ensuring an orderly rebalancing of demand growth, which is essential for a sustained and strong global recovery, and reducing systemic risk. The IMF’s recent review of its mandate and resultant reforms—to surveillance and its lending toolkit—go some way towards addressing these concerns but further reforms are being pursued... "
Global reserve system:
"The recent global financial crisis has again proved the importance of holding adequate reserves in addressing external shocks effectively. A comfort level of reserves has helped smooth consumption during the crisis, and enabled some countries to manage large capital outflows. However, the ongoing, rapid growth in international reserves—for precautionary purposes or otherwise—reflects to some extent the failure of the IMS both to resolve imbalances in an orderly and credible fashion and to provide an adequate global financial safety net. It has costs in terms of foregone domestic investment or consumption, as capital flows from poorer to richer countries. Moreover, with concerns rising about sovereign balance sheets, there may be limits regarding how far existing reserve assets will continue to meet the needs of reserve accumulators.
In this regard, an inevitable question is whether there is a prospective enhanced long-term role for the Fund’s Special Drawing Rights (SDRs) as an international reserve asset. Though the dollar is expected to remain dominant for years to come, the question is whether an evolutionary process towards increased SDR use is feasible and worthwhile."
Global Financial Safety Nets
Surveillance and Policy Coordination
[Mrt: Will it work/succeed or not? Will we re-balance in orderly fashion or not? What role the supplementary reserve asset could play/morph into?]