Toward a More Stable International Monetary System, Opening Remarks by Dominique Strauss-Kahn, Managing Director, IMF

IMF News, February 10, 2011

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Bibliographic details

• Published: February 10, 2011

Context and purpose

• Event: Lecture and Discussion: "Towards a more stable international monetary system"
• Location and date: Washington DC, February 10, 2011
• Speaker: Dominique Strauss-Kahn, Managing Director, International Monetary Fund
• Goal: Set out key questions guiding the IMF’s work on international monetary system reform and to invite discussion on policy responses to volatility and systemic risk.

Central diagnosis: volatility as the core problem

• The international monetary system involves reserve currencies, exchange rates, capital flows, and the global financial safety net.
• Main concern: volatility—money flows that are "too volatile" and an unstable external environment that impedes prosperity.
• Recent history:
  • The U.S. dollar served as a safe haven asset during the crisis.
  • Extraordinary international policy cooperation was required to avert a far worse outcome in 2008.
  • The recovery is underway but "is not the recovery we wanted": unemployment remains at record highs and income inequality is widening.
  • Global imbalances have returned, including large and volatile capital flows, exchange rate pressures, and rapidly growing excess reserves.

Question 1 — How can we strengthen policy cooperation?

• Observations and measures:
  • The G-20’s Mutual Assessment Process (MAP) is an important first step toward a more permanent framework for global policy cooperation.
  • IMF surveillance is a critical complement to the MAP and central to the IMF’s mandate.
  • Steps already taken include early warning and vulnerability exercises.
  • Increased focus on cross-border impact of countries’ policies, particularly for the five most systemic economies, with new dedicated "spillover reports" in preparation.
  • Deeper analysis of macro-financial linkages is underway.
  • Countries representing the world’s 25 most systemic financial systems have agreed to mandatory Financial Sector Assessment Programs (FSAPs), facilitating efforts to detect dangerous system-wide risk build-ups.
  • The IMF is conducting a major review to explore whether more ambitious changes to surveillance are needed.

Question 2 — How best to cope with capital flow and exchange rate volatility?

• Trends and risks:
  • Over the past decade, there has been a dramatic increase in the size and variability of capital flows.
  • Capital flows are broadly beneficial but can complicate macroeconomic management and threaten financial stability, especially in economies with shallow financial sectors.
• Policy toolkit and trade-offs:
  • Policymakers can use macroeconomic adjustment, reserve accumulation, prudential measures, and, in some cases, capital controls.
  • Domestic responses can generate cross-border spillovers.
  • Members have asked the IMF to examine whether globally agreed "rules of the road" for managing capital flows are warranted; concrete ideas are expected to be presented in the near future.
• Exchange rate issues:
  • Exchange rates sometimes show large and persistent deviations from fundamentals.
  • Potential mitigation: increasing the use of the SDR as a unit of account to provide a buffer from exchange rate volatility.

Question 3 — How can we enhance liquidity provision in times of extreme volatility?

• Current progress:
  • Since the crisis, the global financial safety net has been strengthened: the Fund’s resource base has been increased and the financing toolkit broadened, including the Flexible Credit Line and the Precautionary Credit Line.
• Remaining challenges:
  • Many countries remain unconvinced that the global financial safety net is adequate, leading to continued costly reserve accumulation in excess of precautionary needs.
• Options to improve systemic liquidity provision:
  • Strengthen partnerships with regional financing arrangements.
  • Improve the predictability of systemic liquidity provision rather than leaving it predominantly to national central banks.
  • Better gauge the adequacy of precautionary reserves and develop appropriate benchmarks.

Role of the SDR (Special Drawing Right)

• Ideas presented in an IMF paper published the same day include:
  • Increasing the global stock of SDRs to help meet countries’ demand for precautionary reserves.
  • Using the SDR to price global trade and denominate financial assets to provide a buffer from exchange rate volatility.
  • Issuing SDR-denominated bonds to create a potentially new class of reserve assets.
• Currency composition considerations:
  • Adding emerging market currencies—such as the renminbi—could aid the internationalization of these currencies and benefit the system.
• Technical and institutional hurdles:
  • Ensuring SDR allocations are used in ways consistent with global macroeconomic stability.
  • Facilitating trading of SDR-denominated assets.
  • Increasing the SDR’s role would require a major leap in international policy coordination; evolution is expected to be gradual and tied to changes in the global economy.

Conclusions and outlook

• The international monetary system’s issues are wide-ranging and complex; the global debate is only beginning.
• Addressing these issues is directly connected to achieving a well-balanced and sustainable recovery and to preventing future crises.
• The speaker looks forward to continued discussion and input on these themes.

Opening Remarks by Dominique Strauss-Kahn, Managing Director, International Monetary Fund, February 10, 2011

Content in this bundle

• 010711pdf (PDF)

References

• Special Drawing Rights (SDRs) -- A Factsheet
• IMF Policy Advice -- A Factsheet
• Speeches
• PRESS CENTER
• Dominique Strauss-Kahn
• Towards a more stable international monetary system
• IMF Managing Director Calls for Strengthening the International Monetary System
• IMF Executive Board Concludes the Meeting on Enhancing International Monetary Stability—A Role for the SDR?
• Enhancing International Monetary Stability—A Role for the SDR?
• https://www.imf.org/en/home