What is wrong with the International Financial Architecture and some elements for its reform
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What is wrong with the International Financial Architecture and some elements for its reform Alfredo Calcagno. UNCTAD 3 October 2011. The International Financial System does not comply with the goals set in Bretton Woods:. Stable exchange rates at sustainable levels. Capital controls.

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What is wrong with the International Financial Architecture and some elements for its reformAlfredo Calcagno

UNCTAD

3 October 2011


The international financial system does not comply with the goals set in bretton woods
The International Financial System does not comply with the goals set in Bretton Woods:

Stable exchange rates at sustainable levels.

Capital controls.

Timely financing in order to smooth adjustments and limit their costs.

Avoiding lasting imbalances.

In addition,

Legitimacy eroded by unfair distribution of voting rights

« Triffin Paradox »

2


Exchange rates january 2006 sep 2011 domestic currency per dollar january 2006 100
Exchange rates, January 2006 – Sep. 2011 goals set in Bretton Woods: (domestic currency per dollar, January 2006= 100)

3


Exchange rates january 2006 sep 2011 domestic currency per dollar january 2006 1001
Exchange rates, January 2006-Sep. 2011 goals set in Bretton Woods: (domestic currency per dollar, January 2006= 100)

4


Exchange rates january 2006 sep 2011 domestic currency per dollar january 2006 1002
Exchange rates, January 2006-Sep. 2011 goals set in Bretton Woods: (domestic currency per dollar, January 2006= 100)

5


IMF-sponsored programmes systematically underestimate their negative impact on GDP growth and fiscal balances



Current account imbalances widened before the crisis contracted and are widening again billion
Current account imbalances widened before the crisis, contracted and are widening again (billion $)

8


Possible responses 1 at the national level
Possible responses: 1) At the national level contracted and are widening again (billion $)

Select an exchange rate regime that would reduce volatility and real misalignments (managed floating vs. « corner solutions »).

Capital management

Reserve accumulation (self-insurance and limiting appreciation).

Pros and cons:

Worked quite well in 2008

Costs of monetary sterilisation

Works better for avoiding appreciation than depreciation

9


International reserves 2000 2010
International reserves, 2000-2010 contracted and are widening again (billion $)

10


Possible responses 2 at the regional level
Possible responses: 2) At the regional level contracted and are widening again (billion $)

Use of national currencies for international transactions

Clearing systems

Credit among Central Banks

Regional exchange rate system

Regional development banks

« Modularity » of cooperative measures

11


Multilateral payments mechanism contracted and are widening again (billion $)

Liquidity financing

Multilateral mechanisms for financing and supervision

Finance for defending exchange-rates and policy coordination

Single currency and regional Central Bank

Clearing house

Yes

Reciprocal credit agreements (swaps)

Desirable

Yes

Supervision mechanism desirable

Regional reserve funds

Desirable

Yes

Yes

Exchange-rate system

Desirable

Yes

Yes

Yes

Monetary union

Yes

Yes

Yes

Yes

Yes

Different types of financial integration

12


Possible responses 3 at the global level
Possible responses: 3) At the global level contracted and are widening again (billion $)

Debate within the G 20:

Cooperation or « beggar-thy-neighbor »

Still a recessive bias: fiscal adjustment, confidence game, structural reforms

Debate on capital flows, liquidity, reserves, exchange rates

Market-oriented vs. macro prudential policies

More radical reforms?

Multilateral agreements on exchange rates

From regional to global

A true international currency

13


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