Working Paper: CEPR ID: DP8703
Authors: Maurice Obstfeld
Abstract: This paper analyzes current stresses in the two key areas that concerned the architects of the original Bretton Woods system: international liquidity and exchange rate management. Despite radical changes since World War II in the market context for liquidity and exchange rate concerns, they remain central to discussions of international macroeconomic policy coordination. To take two prominent examples of specific (and related) coordination problems, liquidity issues are paramount in strategies of national self-insurance through foreign reserve accumulation, while recent attempts by emerging market economies (EMEs) to limit real currency appreciation have relied heavily on nominal exchange rate management. A central message is that a diverse set of potential asymmetries among sovereign member states provides fertile ground for a variety of coordination failures. The paper goes on to discuss institutions and policies that might mitigate some of these inefficiencies.
Keywords: currency wars; exchange rates; global imbalances; international monetary system; liquidity; triffin dilemma
JEL Codes: F32; F33; F36; F42; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing demand for international liquidity (F30) | pressures on existing monetary framework (E49) |
| accumulation of foreign reserves (F31) | need for self-insurance among nations (F52) |
| countries peg their currencies to the US dollar (F31) | strain on US's ability to provide sufficient reserves (F31) |
| strain on US's ability to provide sufficient reserves (F31) | risk of systemic failure (P34) |
| individual nations' actions to ensure their liquidity (F65) | destabilization of the global financial system (F65) |
| asymmetries in growth rates between advanced and emerging economies (F62) | modern Triffin dilemma (F31) |
| increasing demand for reserve assets (F31) | systemic risks in international monetary system (F33) |
| feedback loops affecting domestic and global financial stability (F65) | risks in international monetary system (F33) |