Monetary spillovers? Boom and bust? Currency wars? The international monetary system strikes back

February 2015

In recent years, the global financial system has witnessed several episodes of instability due to the external repercussions of monetary policy measures by major countries, the development of financial cycles characterised by excessive credit creation followed by sudden stops, and large movements in the exchange rates of both advanced and emerging market economies. The standard therapy for dealing with these disturbances has been a mix of putting one's own house in order, greater transparency and better communication of economic conditions and policy stances, accompanied by more effective financial regulation and safety nets. However, in the face of persistent tensions, there has been increasing recourse to macroprudential measures, capital controls and exchange market intervention. In order to avoid the risk of a return to financial fragmentation and protectionism, it is argued that renewed efforts should be made to manage the international monetary system by strengthening macroeconomic policy cooperation within the institutions that have been set up to preserve international monetary and financial stability. The analytical framework for the conduct of such cooperation has already been developed, and it could be used to provide a "multilateral forward guidance" to global markets to minimise the risk of disturbances.