Barry Eichengreen (2016) characterizes the international monetary and financial system along four dimensions, building on Williamson (1977): 1) exchange rate arrangements; 2) policies towards capital flows; 3) provision of international liquidity; and 4) the oversight of the three via international institutions and country groupings.
Eichengreen is one of the leading international monetary economists and historians. He has always been especially effective at describing and analyzing the global monetary framework across time. When I look at the international monetary system on these four dimensions, I find that we lacking coherence or policies that will affectively raising global growth. Consequently, the longer-term story of secular stagnation or just a lower global growth path will continue to hold. Changes in these dimensions will be necessary to change the slow growth story. Our current views are not positive:
- Exchange rate arrangement – A world between fixed and floating is not satisfying for any major players. Simply put, investors will avoid currency commitment if there is the view that central banks or governments will change the exchange rate arrangement through intervention. We are not being knee-jerk flexible exchange rate advocates but rather simply saying that if the rules of the game change, investors will not want to play the game. Intervention distorts prices.
- Capital flows at the extreme will have real impact on small economies. The Asian Crisis and other example show that hot money flows are not good for the real economy. But, there is a fear that capital control policies will go too far. Restrictions will starve those who need capital and will limit the returns for excess savers.
- The dollar has been the source of international liquidity. A Fed policy of raising rates will impact international liquidity. There is no substitute. Fed policy will impact global liquidity for the negative and actions by the ECB, BOJ, or Bank of China will have some global liquidity impact but it will be muted.
- The oversight of the international policy is limited. The recent G20 meeting is a perfect example of limited talk and no action. The IMF doe snot have the power to solve global problems and there is no forum that will help coordination across central banks.