Future of the global financial and monetary system

Speakers: Pedro Malan, Michel Camdessus, Stan Fischer, Reza Moghadam, Ted Truman, Yi Gang, Afsaneh Beschloss
Moderator: Jean-Pierre Landau

Speakers presentations

Afsaneh Beschloss

• We need dynamism, not static policies; policy makers need market experience
• We are going back to business at usual already in terms of leverage; how do we cooperate and coordinate

Michel Camdessus

• Very worried by rhetoric and analysis in WEO; we have persistent imbalances
• Exchange system disruption would be disastrous in the current weak economic state
• New realities – no convincing system of global surveillance, no available instrument for diversification, need more facilities for lender of last resort role, do central banks have right say in the IMF, need IMF governance change
• Need 3 pillars: new and powerful surveillance system, new and better lending facilities including diversification tool for newly accumulated reserves and SDR-denominated bonds, governance reform
• Need central banks more involved in the discussion on global monetary affairs

Stan Fischer

• Global imbalances contributed to the crisis; but not much progress on this or exchange rate problems – more has been done on financial sector side
• A lot of support for global system in trade in goods and services, but less so on international financial system – no analytic basis that policy makers must accept the decisions of capital markets; we don’t know if we should trust the capital market system
• We know there is overshoot in exchange markets, should we let that feed through? What is the fair burden of adjustment? Capital markets may not produce ideal division of burden of adjustment
• Why can we use fiscal/monetary policy to target exchange rate, but not by intervention? There are some bad things about controls – we need to look at them. Time to figure out what is acceptable and what is not acceptable, what is least damaging and most damaging in terms of controls.
• Motivation of IMF is symmetric adjustment – we failed; so tried flexible x rates – but this only works for rich countries it seems

Pedro Malan

• Massive complacency before the crisis – in many sectors
• Global balances are the right topic for the IMF, and multilateral consultations were right – but there was complacency
• We have never solved the issue of adjustment of surplus countries, we have made some progress though; G20 can provide momentum (without being an executive committee of global economy)
• No agreement on objective indicators on speed or volume of reserve accumulation; but we should try to reach it; won’t be full consensus, but we can higher degree of convergence

Reza Moghadam

• Last time we discussed monetary system was 40 years ago; after 1997 failure of capital account mandate amendment we had no traction to discuss for 13 years
• Gaps in current system – can’t manage situations related to shortage or excess global liquidity; savings in surplus economies being intermediated in advanced economies – need to deepen fin sectors in EMEs, shortage of global safe assets
• Spectrum: rules based systems to force adjustments versus dominance of domestic policy considerations; we should aim for space in the middle, there is no magic bullet, need menu of policies
• 5 proposed areas of work: surveillance, spill-over reports; reserve accumulation and global financial safety nets; capital flows; promotion of new reserve assets; financial deepening in emerging markets
• Of course need governance reform as well

Ted Truman

• If the work on capital flows is done only within the Fund – that isn’t enough; must involve and engage the membership on a working group on capital flows
• Monetary system is not the financial system; financial system is the whole and monetary system is the part that involved official sector – monetary system is the tail on the dog today – financial system is far larger you can’t leverage change there with monetary change
• Causes of crisis – gross flows are across Atlantic were key, not net flows across the Pacific
• Flaw in the monetary system – uncontrolled reserve accumulation is a symptom of lack of insurance, lack of symmetrical adjustment process

Yi Gang

• Basically global monetary policy set by Fed, ECB and BOJ; developing countries are takers of monetary policy; central bank control real effective exchange rate through nominal rate or price level only
• China will have constant pressure for wage increases as we exhaust supply of free labour; more cost increases from real estate/non tradeables, environmental standards increase
• Yuan didn’t depreciate in Asian financial crisis or in late 2008
• Structural problem – China trade surplus is largely processing, trade deficit in traditional sectors, with surplus only from processing industry – international division of labour comes from multinationals operating around the world – interconnectedness between countries
• We are committed to a more flexible exchange rate regime, it will be gradual approach; current account surplus is declining over time, we aim for less than 4%

Conclusions: Need cooperation/collective action; importance of intl capital markets in the system; we need better understanding and research; sense of urgency for reform