Paris, 7 November 2014
"...Excessive elasticity of the international monetary system
My second remark is related to the international monetary system. Since the end of the dollar’s link to gold, the de facto global anchor of the system is just the aggregate of the domestic monetary policies of the major reserve currencies. These policies may serve the domestic needs of each country or currency area. But this does not mean that they add up well for the world economy as a whole. The lack of a strong anchor is a key factor behind the excessive elasticity of the system. This means its inability to prevent the build-up of financial imbalances in the form of unsustainable credit and asset price booms.
The global policy interest rate needed for the entire world is very hard to achieve given the near-zero policy rate (negative in real terms) in the G7 countries (Graph 3). In particular, the IMF’s SDR interest rate in October was 3 basis points, with negative contributions from three-month eurepo and Japanese government bills.
The nominal global policy rate is currently around 2% (Graph 4). In a world growing in nominal terms by 5–6%, the global policy rate should surely exceed its current 2% level. The influence of the 3 basis-point SDR rate on this 2% global policy rate is one of the world economy’s great asymmetries.
I commend the IMF for trying to integrate the global dimension in its spillover reports. But the monetary policy recommendations for reserve currencies in its Article IV or World Economic Outlook reports tend to take a purely national perspective. Indeed, over the past 15 years in my recollection the IMF’s recommendations on monetary policy have almost always been in the direction of more easing. This suggests to me that the global perspective of the build-up of financial imbalances has been missing. All this means that the lack of global anchor of the international monetary system, well described by Tommaso Padoa-Schioppa, remains. And so does the system’s excessive elasticity and inability to constrain effectively global liquidity.