Fixing Four Key Fault Lines in the Global System

International monetary system has underpinned strong growth in GDP and globalization

But imbalances, volatility, and frequent crises have also been features

Amid vibrant debate, analysis seeks to forge consensus on problems, solutions

In the wake of the global economic crisis, a number of leading economists, policymakers, and several groups have offered diverse perspectives on problems in the international monetary system (IMS) and how to reinforce it.

The IMS refers to the set of internationally agreed rules, conventions, and supporting institutions that facilitate international trade and cross-border investment, and the flow of capital among countries.

A new IMF staff paper, “Strengthening the International Monetary System—Taking Stock and Looking Ahead,” aims to inform those interested in the debate and forge a common understanding of the reform agenda.

The paper says that the system, which has survived for over 40 years, has underpinned strong growth in GDP and in the international exchange of goods and capital, one of its core objectives. “As a result, interdependence among the world’s economies has grown dramatically, making the existence of a sound system ever more important.”

Many symptoms of instability

But IMF economists say that, at the same time, the system has exhibited many symptoms of instability—frequent crises, persistent current account imbalances and exchange rate misalignments, volatile capital flows and currencies, and unprecedentedly large reserve accumulation.

“These symptoms have come to a head since the 2008 crisis and brought renewed international momentum to the idea of attempting to reform the IMS. Yet the debate so far suggests little consensus on the underlying problems, let alone on the solutions,” the paper says.

Going beyond the symptoms, the paper identifies four root causes for instability in the current system:

• inadequate global adjustment mechanisms to prevent or resolve inconsistent policies among systemic countries; this reflects in part the fact that the current system leaves to each country the choice of its exchange rate and capital account regimes, but also limits obligations on domestic policies to aiming for domestic stability.

• lack of a global oversight framework for growing cross-border capital flows and linkages, covering both source and recipient countries;

• inadequate systemic liquidity provision mechanisms to ensure continued access to much needed international liquidity in...