Monday, August 27, 2012


Pietro Catte

"...On the role of a monetary policy anchor, Padoa-Schioppa suggested that the original Triffin dilemma – the need for the United States to provide dollar reserves to the world would inevitably undermine confidence in the dollar, as its dollar liabilities would eventually exceed its gold holdings – was just a special case of the more general flaw of any international monetary regime based on a national currency. That is, a US monetary policy conducted pursuing solely domestic objectives could not provide an adequate global anchor, and would ultimately prove inconsistent with the stability requirements of the system as a whole.

A conceivable SDR-centred system – the development of private SDR markets turning special drawing rights into a true reserve asset usable for official intervention and serving as a benchmark for countries’ exchange rate policies – might have the advantage of being more symmetrical and therefore subjecting issuers of reserve currencies to greater policy discipline. But it would not truly resolve the inconsistency as long as the SDR remained just a basket and the global monetary stance just the average policy stance of its component currencies. “In the absence of a global policymaker pursuing ‘what is beneficial for the world’, a mere average of policies driven by national objectives cannot produce the global public good of a stable monetary anchor on a global scale.”

What type of arrangement could play the role of “global policy-maker”
? One conceptually viable solution would be a truly global currency – perhaps the SDR itself, if it should morph into a full-fledged currency – managed by a global policy-maker in order to meet the global demand for reserves, with the policy stance determined by the scarcity of its supply. However, such a solution, reminiscent of Keynes’ Bancor, would probably be regarded as far-fetched by many observers. An alternative, at least in theory, would be policy coordination among the main monetary areas, but while some elements of a framework for coordination already exist (the IMF, the BIS, the G7, the G20), Padoa-Schioppa contended that this alternative may be no less far-fetched. “All past and recent experience suggests that, in practice, coordination fails precisely when it is most needed, i.e. when policy preferences are most divergent”.20 In the end, he did not offer a solution: “For the time being, I think we can conclusively prove that we need a flying object; inventing the airplane is a different matter altogether.”..."

Padoa-Schioppa was strongly critical of the thesis that interdependence could be selfregulating, with no need for supranational governance, and identified as one of that view’s ideological underpinnings the doctrine of the “house in order”. According to that doctrine, if every country pursued sound domestic policies, international order and stability would automatically follow. There would be no need for national authorities to decide anything in common; it would be enough for them to exchange information. Cooperative arrangements could even be dangerous, insofar as they might blur policy responsibilities and provide an excuse to deviate from sound national policies. Padoa-Schioppa found this notion dangerously misleading.21 First, while universal adherence to sound policies would obviously help, it cannot be seen as a precondition for cooperation, since a cooperative order is needed precisely to create the proper incentives for good behaviour and to manage the consequences of deviations from it. Second, even if all houses were in order, there would still be “common areas” (trade and financial relations, exchange rates, health, the environment, poverty) where externalities are too important to be ignored and need to be managed in common.


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