International Financial and Monetary Stability: A Global Public Good? - Remarks by Michel Camdessus
IMF News, May 28, 1999
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- Published: May 28, 1999
Monetary system as a global public good; exchange rates and major currencies
- Proposition: the international monetary and financial system "may be seen as a global public good."
- Core observation: there is no world money controlled by a world monetary authority; the U.S. dollar, the Euro, and the Japanese yen perform double duty as national monies and as monies used widely for international trade and financial transactions.
- Public-good aspect of national monetary policy:
- "When non-residents use a national money... national monetary policies acquire aspects of global public goods."
- Exchange rates are the relative price of two national monies and are affected by national monetary policies.
- The international public goods significance rises for exchange rates among the world's major currencies because their use is global and movements have widespread effects.
- Domestic orientation of major currency monetary policies:
- Primary domestic objectives include "promoting domestic economic and financial stability" and "reasonable stability of the domestic price level."
- Exchange rates influence monetary policy mainly to the extent they affect these domestic objectives.
- From a global perspective, promoting domestic stability in dominant economies is "essential" for global stability and prosperity.
- Argument for greater attention to international consequences:
- Recent experience suggests "somewhat more attention can be paid to international consequences and specifically to exchange rates" in large economies.
- Example: in early 1995 the U.S. dollar plunged below 80 yen and below 1.35 deutsche marks; this "tended to undermine recovery in the weak Japanese economy" and "was a factor in the slowing of growth in Europe" and contributed to problems leading up to the Asian crisis.
- Official responses in 1995: cuts in official interest rates in continental Europe and Japan; coordinated intervention by Japan and the United States; these actions were judged "successful and important" in reversing the dollar's unwarranted weakness.
- Role of forward-looking monetary action during the 1998 liquidity crisis:
- After Russia's default and the near failure of LTCM, a liquidity crisis hit second-tier markets; yields on highest rated U.S. Treasury and German government bonds fell sharply while spreads widened dramatically and new issue activity dried up for virtually all emerging market issuers.
- The U.S. Federal Reserve "took the lead" and easing in the United States, the Euro area, and Japan that "took account of conditions in global financial markets beyond those of immediate domestic concern" helped forestall risks of a deeper global downturn.
- Cautions and limits:
- Domestic considerations will often outweigh external considerations; substantial exchange rate movements can be appropriate.
- Example: the relatively strong U.S. dollar was consistent with the strong cyclical position of the U.S. economy and helped to forestall inflationary pressures.
- Example: when the yen fell to 145 to the U.S. dollar in mid 1998, neither tightening Japanese monetary policy nor easing U.S. monetary policy appeared appropriate; coordinated (sterilized) official intervention could have signaled market mispricing.
- On intervention:
- Historical view (Jurgensen report): intervention is "not a very powerful tool" especially unsupported by other policies.
- Markets can err due to "bandwagon effects, manias, panics, and other anomalies," moving exchange rates far from fundamentals.
- Official sector "can and should press further to resist unwarranted movements in major currency exchange rates" while avoiding excessive ambition or timidity.
IMF financial assistance, conditionality, moral hazard, and new instruments
- Purpose according to Articles of Agreement:
- Quoted Article 1: "To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity."
- Broader role: offering assurance of assistance to encourage open policies toward international trade and capital movements; suggestion that "it is high time for the Fund's Articles to be amended" to reflect support for prudent capital movement policies.
- Constraints on Fund assistance:
- Use of "general resources" should be "temporary," subject to "adequate safeguards," and used to "correct maladjustments" without "resorting to measures destructive of national or international prosperity."
- These constraints reflect international willingness to provide interest-bearing loans, not grants, to countries acting constructively.
- Moral hazard:
- Fund loans with expectation of repayment mean the Fund "is not absorbing losses that should be borne by members or their creditors" and thus does not directly contribute to moral hazard.
- Fund conditionality presses recipients to reform policies to correct current problems and reduce future payments difficulties; financial sector reforms are emphasized.
- With reforms and improved international financial architecture and constructive private sector involvement, "the problem of moral hazard can be adequately contained, though of course it cannot be completely eliminated."
- New precautionary tool:
- Contingent Credit Line (CCL): a facility for countries "not yet in difficulty but fear contagion"; access limited to countries "judged to already have a sound framework of economic policies"—a reward in advance for good policies rather than assistance conditional on reform when crises occur.
- Debate over size and conditionality of support packages:
- Some argue for smaller packages and tougher conditionality to contain moral hazard; others argue for larger packages with easier conditionality given large costs of crises.
- Camdessus's view: "both adequate financing and firm conditionality are required" for Fund programs to best serve the global public good.
- Cooperative financing:
- The Fund has not acted alone; additional support has come from the World Bank, the Asian Development Bank, the Inter-American Development Bank, and bilaterally from national governments and central banks.
- Recent initiatives, including that of the Japanese government for several Asian countries, confirm the judgment that additional support was necessary and appropriate.
- Program design lessons:
- Initial economic assumptions in several programs proved "substantially too optimistic"; program flexibility to revise policies was appropriate in some cases (shifting from initial tightening to subsequent easing of fiscal policies).
- For monetary policies, initial tightenings were "the right policies" and "absolutely essential" to resist excessive exchange rate depreciations.
- Countries that abandoned programs after losing market confidence "have not fared well"; those that "pressed vigorously ahead are beginning to see the fruits of their efforts."
- Main forward worry: "that recovery may blunt the impetus for reform"; it's "essential to keep the reform process moving forward."
Assistance to poorest countries and global equity as a public good
- Concern: poorest members are becoming marginalized and not sharing fully in benefits of global economic and financial integration.
- Dual rationale:
- Symmetric benefit: better integration of poorest countries produces benefits through increased trade and investment opportunities for others.
- Ethical/public-responsibility rationale: global public good requires meaningful efforts to reduce disparities of income, resources, and opportunities that exceed typical national redistributive efforts.
- IMF activities and instruments:
- Policy advice through deeper surveillance.
- Extensive program of technical assistance and training.
- Concessional financial assistance through ESAF.
- Work with World Bank to strengthen the HIPC Initiative for debt relief to poorest and most heavily indebted countries; preparing principles to move this initiative forward.
- Expectation of an important step at "Next months G-7 summit in Cologne."
- Limitations and complementary policies:
- Policy advice, technical assistance, concessional financing, and debt relief alone "will not alone provide many of these countries with the ability to grow their way out of poverty."
- Aid and debt relief policies must be better coordinated with trade and investment policies.
- Evidence from successful development cases demonstrates importance of trade linkages and direct investment flows for sustainable growth.
- Camdessus advocates "across-the-board, duty free access to advanced country markets for the least developed countries" to promote growth and reduce poverty.
- Calls for elimination of misguided protectionist policies that impair growth in poorest countries, "although not as a prerequisite for action by the advanced countries."
Overarching conclusion
- Two great global public goods of the postwar era: "an increasingly open system of world trade, and an increasingly and prudently liberalized system of world finance."
- The effort to reform the international monetary and financial system aims "to sustain and enhance these public goods."
Source: International Financial and Monetary Stability: A Global Public Good? - Remarks by Michel Camdessus, May 28, 1999.