Rethinking the International Monetary System
2015; Cato Institute; Volume: 36; Issue: 2 Linguagem: Inglês
ISSN
1943-3468
Autores Tópico(s)Monetary Policy and Economic Impact
ResumoIn previous articles in annual monetary issue of Cato Journal, I drew on historical facts and economic theory to explain benefits of rules-based monetary policy and why legislation could help United States reap those benefits (Taylor 2011, 2013a). In this article, I discuss international aspects of monetary policy, a subject often glossed over in modern debates about rules-based policy, at least compared with discussions about classic rules-based gold standard. (1) The Situation As I see it, international monetary system has drifted away in recent years from kind of steady rules-based system long advocated by academic reformers and experienced practitioners across economic spectrum all way from Milton Friedman (1953) to Paul Volcker (2014). When you look around world, you see huge swings of capital especially and out of emerging markets; you see increased volatility of exchange rates reminiscent of currency wars and competitive devaluations; and worst of all you see poor economic performance, including a global financial crisis, a great recession, a very slow recovery, and now disappointing economic growth in many emerging markets and developing countries. (2) On economic policy front, you see spread and amplification (3) of unusual monetary policy actions and interventions across countries; you see governments increasingly imposing capital controls, intervening in exchange markets, and fine-tuning macro-prudential regulations to affect international exchange transactions. You even see top officials at international financial institutions endorsing such controls and interventions, suggesting that they should be built a new global system, a far cry from days when these institutions were arguing for removal of such controls. (4) These developments have led some to conclude that a steady rules-based international monetary system is literally impossible, at least one built on three-pillar foundation of flexible exchange rates, open capital markets, and an independent rules-based monetary policy in each country. This foundation was implicit in Milton Friedman's (1953) case for flexible exchange rates, which held that the logical domestic counterpart of flexible exchange rates is a strict fiduciary currency changed in quantity in accordance with rules designed to promote domestic stability. And it was explicit in research work starting in 1980s, which found that each country followed its own rules-based monetary policy consistent with its own domestic stability, result would be a nearly optimal international rules-based system. (5) After documenting recent surges and retrenchments in capital flows for central bankers at a recent Jackson Hole conference, Helene Rey (2014) argued that there is an duo: independent monetary are possible and only capital account is managed, directly or indirectly via macro-prudential policies and if they are not sufficient, capital controls must also be considered. In other words, independent monetary and open capital markets are irreconcilable. And after reviewing evidence that monetary policy in several central banks is significantly contaminated by policy spillovers from decisions at other central banks, (6) Sebastian Edwards (2015b) called into question idea that under flexible exchange rates there is monetary policy independence. He thereby pointed out another apparently irreconcilable duo: independent monetary designed to achieve domestic economic stability and flexible exchange rates. The Problem In my view, there is no inherent incompatibility between internationally independent monetary and either open capital markets or flexible exchange rates. The recent empirical correlations that suggest otherwise are likely spurious, stemming from a substantial deviation from rules-based monetary policy in many countries, which is neither necessary nor advisable. …
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