Global Agenda Council on the International Monetary System 2012-2013
In the years preceding the Great Depression, an initiative to stabilize international capital flows led the United States to adopt a loose monetary policy. An unintended consequence was the creation of a speculative bubble in asset prices. The subsequent bursting of this bubble led to a contraction of money supply in the United States, setting off a deflationary spiral which eventually enveloped economies across the globe. Coordinated efforts by the global central banks of the day could probably have stemmed the decline in global growth, but such cooperation proved elusive. As a result, trade flows declined precipitously, speculative attacks were launched on European currencies, banks failed across the United States and sovereign defaults occurred across Europe, setting the stage for the Great Depression. How different is the current scenario?
In an increasingly multipolar world, global cooperation is essential for an orderly flow of money. If cross-border capital flows are disrupted or there is uncertainty within the system, the global economy can experience bouts of volatility leading to imbalances that are unsustainable. Crises have been episodic in the post-Bretton Woods era, but over the past half-decade the vulnerabilities of the international monetary system (IMS) have again become apparent. Recent years have seen a bifurcation of the world economy into one group of countries with freely floating currencies, and another practising greater supervision over exchange rates and cross-border capital flows.
The integration of trade and capital flows has created the need for a system that can adequately respond to shocks. The current IMS needs to adjust in an evolving world where the current dollar-based system is likely to be replaced with a multipolar currency system. How this new system will play out is uncertain, but cooperation across countries and governing institutions will be absolutely critical to maintaining stability.
- Global currencies are moving closer to fair value. According to a recent study on fundamental equilibrium exchange rates, the average global misalignment, as measured by the weighted size of an economy, is closer to face value than at any time during the global financial crisis.
- Global use of the yuan to settle cross-border trades is on the increase, having grown from virtually zero in 2009 to over 265 billion yuan in the first 10 months of 2011.
- Global capital flows are increasing at a greater pace than trade flows. World trade almost tripled from 1990 to 2010, while international capital flows increased almost fivefold over the same period.
“With international imbalances, such as asymmetric growth in different regions of the world, likely to persist for much longer, there is an acute need to be able to adjust international imbalances without causing a collapse of global demand. However, no such adjustment process exists today."
“What concerns me is failure here could undermine the international economic and financial integration, and the move towards more open global markets that has underscored the progress that we’ve made over the past 60 years in the post-World War II era, that for all its problems has represented the period of most rapid sustained economic growth and the most significant reduction in poverty worldwide that we have ever known.”
The International Monetary System after the Financial Crisis
Reform of the International Monetary and Financial System
Euro, Dollar, Yuan Uncertainties: Scenarios on the Future of the International Monetary System
Reforming the International Monetary System. September, 2011. London: Centre for Economic Policy Research.
G20 Meetings of Finance Ministers and Central Bank Governors
3-4 November 2012
Mexico City, Mexico
Inaugural Forum for Economic Dialogue: Future of the International Financial System
19 November 2012
Spring Meetings of the World Bank Group and the International Monetary Fund
19-21 April 2013
Washington DC, USA
The Global Agenda Council on the International Monetary System aims to discuss the current state of the system, identify shortcomings against the backdrop of events emanating from the global financial crisis, and develop a set of recommendations for reforming the system. The Council will focus on both addressing short-term issues and devising a set of long-term recommendations.
During the 2011-2012 term, the Council focused on what Members determined were the most urgent issues facing the system. Working across the network to develop multistakeholder solutions, Council Members engaged in an analysis of the G20 policy-making process, the rise of regionalism and its implications for the IMS, as well as the role of international organizations in strengthening the system. Several scenarios on the future of the IMS were developed.
For the 2012-2014 term, the Council aims to continue to focus on short-term risks to the system. Current imbalances being observed in different regions of the world are likely to persist. Instead of an adjustment to a multi-currency system, there is a risk of a return to the dollar as a safe haven, which will only delay the adjustments necessary in today’s world where the growth axis is shifting. The Council will examine these issues and offer possible solutions.
The Council will also study myriad medium-term issues: managing global liquidity, exchange rate volatility, the disciplinary forces at play during the adjustment process, and issues of decision-making and operations within the IMS. The Council will investigate the opportunities and challenges presented by regional arrangements and the importance of regional and international institutions.
In particular, the Council will focus on:
- Global liquidity management
- A possible return to regionalism
- Movement towards multipolarity
Council Manager: Liana Melchenko, Associate Director, Head of Knowledge Management, Global Agenda Councils, email@example.com
Forum Lead: Michael Drexler, Senior Director, Head of Investors Industries, firstname.lastname@example.org