International Banking and Financial Market Developments

Abstract

Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper No. 203 http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0203.pdf The International Monetary and Financial System: Its Achilles Heel and What to do about it* Claudio Borio Bank for International Settlements October 2014 Abstract This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the “excess saving” and “excess demand for safe assets” views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining …

Source: pdf_first_chars