DOCSLIB.ORG

The Political Economy of Reducing the US Dollar's Role As a Global

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Political Economy of Reducing the US Dollar's Role As a Global A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Yap, Josef T. Working Paper The political economy of reducing the United States dollar's role as a global reserve currency ADBI Working Paper, No. 302 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Yap, Josef T. (2011) : The political economy of reducing the United States dollar's role as a global reserve currency, ADBI Working Paper, No. 302, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: http://hdl.handle.net/10419/53568 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu ADBI Working Paper Series The Political Economy of Reducing the United States Dollar’s Role as a Global Reserve Currency Josef T. Yap No. 302 July 2011 Asian Development Bank Institute Josef T. Yap is president of the Philippine Institute for Development Studies (PIDS). This paper was prepared for the forum on “Diversification of Reserve Currencies and Development of Regional Financial Markets in Asia”, November 26, 2010, Beijing, organized by the China Center for International Economic Exchange and Asian Development Bank Institute. The excellent research assistance of Ms. Kris A. Francisco and Ms. Danileen Kristel C. Parel, Research Analysts II at PIDS, is gratefully acknowledged. The usual disclaimer applies. The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of ADBI, the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. Suggested citation: Yap, J. 2011. The Political Economy of Reducing the United States Dollar’s Role as a Global Reserve Currency. ADBI Working Paper 302. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working- paper/2011/07/29/4670.political.economy.us.dollar.role/ Please contact the authors for information about this paper. Email: [email protected] Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2011 Asian Development Bank Institute ADBI Working Paper 302 Yap Abstract Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a “handmaiden” to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this “exorbitant” privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the “first-mover advantage”. Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances. JEL Classification: F31, F33 ADBI Working Paper 302 Yap Contents 1. Introduction ................................................................................................................ 3 2. The International Monetary System ........................................................................... 4 2.1 Is it a Non-system? .......................................................................................... 4 2.2 Explaining Global Macroeconomic Imbalances ................................................ 5 2.3 Global Imbalances and the 2008 Crisis .......................................................... 10 3. The Role of the US Dollar ........................................................................................ 11 3.1 The Triffin Dilemma........................................................................................ 12 3.2 System Maker and Privilege Taker ................................................................ 12 3.3 Support from Major Allies ............................................................................... 14 3.4 Does a Problem Really Exist? ........................................................................ 15 3.5 Demand Side versus Supply Side .................................................................. 16 4. Political Economy of Reform .................................................................................... 17 4.1 Narrowing Global Imbalances ........................................................................ 17 4.2 Reform of the International Financial Architecture .......................................... 19 4.3 Reform at the Regional Level ......................................................................... 20 5. Policy Implications ................................................................................................... 21 References ......................................................................................................................... 25 ADBI Working Paper 302 Yap 1. INTRODUCTION Just two years after the 2008 global financial and economic crisis, many economies are grappling with the problem of a rapidly depreciating US dollar (hereafter referred to as “dollar”). Exchange rate volatility has been a recurring problem since the dollar-gold exchange standard was abandoned in 1973 (Figure 1). This was compounded by a sharp increase in global macroeconomic imbalances during the past decade. Of greatest concern in matters related to the international monetary system are the periodic financial and currency crises that have buffeted the global economy. Some experts have argued that the volatile exchange rates, large macroeconomic imbalances, and increasingly frequent financial crises are largely due to an international monetary system that is inherently unstable and inequitable (Ocampo, 2009; Teunissen and Akkerman, 2007; Teunissen and Akkerman, 2006). Figure 1: US Current Account Deficit and Real Effective Exchange Rate, 1975–2009 2 140 1 120 0 100 -1 -2 80 Current Account -3 60 Real Effective -4 Exchange Rate 40 -5 20 -6 -7 0 Note: Real effective exchange rate here is calculated as the inverse of the real effective exchange rate estimated by the IMF. Source: World development Indicators, World Bank Policy responses will depend on the underlying causes of the problem and the constraints imposed by political reality. An understanding of these two factors is important. The analysis will define appropriate policies at the global, regional, and national level. Even if the problem is well- defined the appropriate solution may not be feasible because of realpolitik. For example, many experts have criticized the ‘exorbitant’ privilege the US enjoys because
Load more

Recommended publications
  • The European Payments Union and the Origins of Triffin's Regional Approach Towards International Monetary Integration
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Maes, Ivo; Pasotti, Ilaria Working Paper The European Payments Union and the origins of Triffin's regional approach towards international monetary integration NBB Working Paper, No. 301 Provided in Cooperation with: National Bank of Belgium, Brussels Suggested Citation: Maes, Ivo; Pasotti, Ilaria (2016) : The European Payments Union and the origins of Triffin's regional approach towards international monetary integration, NBB Working Paper, No. 301, National Bank of Belgium, Brussels This Version is available at: http://hdl.handle.net/10419/173757 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen
    [Show full text]
  • The International Monetary Crunch: Crisis Or Scandal? JANJOOST TEUNISSEN 359
    Alternatives Social Transformation and Humane Governance. Volume XI Number 3 July 1987 Contents On Humane Governance RAJNI KOTHARI 277 One True World or Many? A Gandhian Perspective RAMASHRAy Roy 291 Sexist and Racist Implications ofNew Reproductive Technologies MARIA MIES 323 Political Philosophy and Orientalism: The Classical Origins ofa Discourse SHIRAZ DOSSA 343 The International Monetary Crunch: Crisis or Scandal? JANJOOST TEUNISSEN 359 SPECIAL FEATURE A Statement Issued to Mark Human Rights Week and Pearl Harbor Day 397 Alternatives XII (1987), 359-395 The International Monetary Crunch: Crisis or Scandal? JAN JOOST TEUNISSEN* Today there is probably no ·other area of human concern that affects more deeply the living conditions of people allover the world than that of international finance. Nevertheless, the main policy-making in this field is in the hands of. an amazingly small group comprising central bankers and finance ministers in the rich countries, heads of international organizations such as the International Monetary Fund and big commercial bankers. The opinion of people outsid~ this charmed circle of financial managers is hardly ever taken into account. This is a pity, since economic policy-makers tend by both temperament and training to be rather narrow-minded; their thinking moves In a groove. Robert Triffin, an expert on international finance for ,nearly 50 years, and one of the interlocutors in the following narration, explained it in this way: 'Just as Clemenceau once said that war is much too serious a thing to be left to the gener'als, I think the economy is far too serious a thing to be left to the economists.' The truth of his statement is brought home when we look at the way Western financial authorities are handling the so-called international debt crisis.' In their view, most of the blame for this crisis must be laid on the developing countries.
    [Show full text]
  • The International Monetary System: Quo Vadis
    Columbia University Department of Economics Discussion Paper Series The International Monetary System: Quo Vadis Robert A. Mundell Discussion Paper #:0102-34 Department of Economics Columbia University New York, NY 10027 March 2002 The International Monetary System: Quo Vadis Robert Mundell Columbia University February 8, 2001 Manuel Guitian Memorial Lecture, International Monetary Fund, February 8, 2001 I. Manuel Guitian Manuel Guitian was one of two brilliant students I met in 1965 at the Graduate Institute of International Studies in Geneva. Both went on to the University of Chicago for the Ph.D. program and to great distinction as economists. The other student was Rudiger Dornbusch. My students at Geneva were required to write a research paper on international monetary economics. Manuel and I agreed that he should look into the Poincare-Rist stabilization of the franc in 1926. That got him interested in exchange rate theory and it was an interest that persisted throughout his life. The quality of his analysis of that important episode from the inter-war years convinced me that Manuel had a good future as an economist and I encouraged him to go to Chicago for his Ph.D. University of Chicago Economics in the late 1960s was in one of its golden periods, maybe comparable to Vienna in the 1880s or Harvard, Chicago or Cambridge in the 1930s. There were Frank Knight (emeritus), Earl Hamilton (emeritus), Milton Friedman, Theodore Schultz, Harry Johnson, George Stigler, Hiro Uzawa, Arnold Harberger, Merton Miller, Bert Hoselitz, Robert Fogel, D. Gale Johnson, Gary Becker, Robert Aliber, Arthur Laffer, Stanley Fischer, Herbert Grubel, and myself.
    [Show full text]
  • Nine Lives of Neoliberalism
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Plehwe, Dieter (Ed.); Slobodian, Quinn (Ed.); Mirowski, Philip (Ed.) Book — Published Version Nine Lives of Neoliberalism Provided in Cooperation with: WZB Berlin Social Science Center Suggested Citation: Plehwe, Dieter (Ed.); Slobodian, Quinn (Ed.); Mirowski, Philip (Ed.) (2020) : Nine Lives of Neoliberalism, ISBN 978-1-78873-255-0, Verso, London, New York, NY, https://www.versobooks.com/books/3075-nine-lives-of-neoliberalism This Version is available at: http://hdl.handle.net/10419/215796 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative
    [Show full text]
  • The European Payments Union and the Origins of Triffin’S Regional Approach Towards International Monetary Integration
    The European Payments Union and the origins of Triffin’s regional approach towards international monetary integration Working Paper Research by Ivo Maes and Ilaria Pasotti September 2016 No 301 Editor Jan Smets, Governor of the National Bank of Belgium Statement of purpose: The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. Orders For orders and information on subscriptions and reductions: National Bank of Belgium, Documentation - Publications service, boulevard de Berlaimont 14, 1000 Brussels Tel +32 2 221 20 33 - Fax +32 2 21 30 42 The Working Papers are available on the website of the Bank: http://www.nbb.be © National Bank of Belgium, Brussels All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. ISSN: 1375-680X (print) ISSN: 1784-2476 (online) NBB WORKING PAPER No. 301 – SEPTEMBER 2016 Abstract Robert Triffin (1911-1993) played an important role in the international monetary debates in the postwar period. He was known as one of the main advocates of a multipolar international monetary system. In this paper we analyse the origins of Triffin’s “regional” approach towards international monetary integration. We argue that Triffin’s experience with the European Payments Union (EPU) played hereby a crucial role.
    [Show full text]
  • The Pursuit of Reform
    Richard N Cooper Stephany Griffith-Jones PeterB. Kenen John Williamson and others The Pursuit of Reform Global Finance and the Developing Countries Edited by JanJoost Teunissen FONDAD, The Hague, November 1993 The Pursuit ofRefonn: Global Finance and the Developing Countries Proceedings of the Conference on the Functioning of the International Monetary System and Financing of Development, held at the Netherlands Ministry of Foreign Affairs in The Hague on 21-22 June 1993, organised by the Forum on Debt and Development. Editor: JanJoost Teunissen The views expressed in this book do not necessarily represent those of the Forum on Debt and Development. Summaries of the floor discussions following the papers attempt to convey the sense and substance of what was discussed. They have not been reviewed by the authors, the discussants, or the participants concerned. elF-DATA KONINKLI]KE BIBLIOTHEEK, DEN HAAG Pursuit The pursuit of reform: global finance and the developing countries / Richard N. Cooper ... [et al.] ; ed. Jan Joost Teunissen. - The Hague: FONDAD. - Ill.. Proceedings ofthe Conference on the functioning ofthe international monetary system and the financing of development, held at the Netherlands Ministry of Foreign Affairs in The Hague on 21-22 June 1993, organised by the Forum on Debt and Development ISBN 90-74208-03-7 Subject heading: capital market / monetary system / development cooperation Copyright: Forum on Debt and Development (FONDAD), 1993 Permission must be obtained from FONDAD prior to any further reprints, republications, photocopying, or other use of this work. The copyright of the paper by John Williamson is with the Institute for International Economics, Washington DC.
    [Show full text]
  • The Triffin Dilemma Again
    Discussion Paper No. 2009-46 | November 4, 2009 | http://www.economics-ejournal.org/economics/discussionpapers/2009-46 The Triffin Dilemma Again Edoardo Campanella World Trade Organization, Geneva Please cite the corresponding journal article: http://www.economics-ejournal.org/economics/journalarticles/2010-25 Abstract Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of its double role of national and international currency. This is what I call the Triffin dilemma, an ever green concept in international finance. In the paper I show how it works through three examples: price of commodities, dollarization, and the international financial position of the US. I argue that to solve this situation, it would be important to create a more democratic monetary system, in which all the countries have a decision weight. In particular, I think that globalization and regionalization should be the two forces leading towards the new monetary system. The main economies should adopt the same currency through a system of fixed exchange rates (global money); developing countries should create regional monetary unions (regional money), preserving the real exchange rate as real shock absorber, but gaining in terms of time consistency and credibility. Submitted as Policy Paper JEL: F33 Keywords: Triffin dilemma; global currency; regional monetary union; dollarization Correspondence Edoardo Campanella, World Trade Organisation, 154, rue de Lausanne, 1211 Geneva, Switzerland; e-mail: [email protected]. The author wrote this paper when he was studying at Barcelona Graduate School of Economics. He is very grateful to Broner, Ventura and Voth for useful suggestions. The opinions expressed in this paper should be attributed to the author.
    [Show full text]
  • The World Crisis and the International Monetary System: Revisiting the Triffin’S Dilemma?
    The World Crisis and the International Monetary System: Revisiting the Triffin’s Dilemma? WIIW Seminar Series WIIW/JVI Joint Seminar April 12, 2010 Christian Ghymers Visiting Scholar at JVI Senior Adviser DG ECFIN/EC What is the purpose? Global crisis commonly attributed to some “systemic aspects” of the market economy Mainly pointing to the financial sector and its lack of adequate regulation => subprime & excess of credit leverage => boom/bust Some minority views accuse either the Fed to have inflated too much (J. Taylor) or the so-called “International Monetary System” for having developed persistent macroeconomic disequilibrium with spillovers from national policies The purpose and scope of this presentation => to raise basic systemic aspects of international payments => to characterize the resulting architecture => to identify the failures => opening the debate about reforms The amazing fact: IMS is not really questioned Amazingly the IMS aspects do not seem anymore a key- aspect of the debates G-20 and economist forum focus mostly upon financial regulation, and exchange-rate undervaluation of the Chinese currency (including the Chinese worries for their gigantic-strategic $ reserve) Difficult to understand from a methodological point of view why the economist community overlooks the IMS weaknesses and its possible link with monetary excesses as a cause of the crisis (and doing so for 5 decades!) If this thesis is right => more catastrophic crisis in the pipeline Overview 1) What is International Monetary System (IMS) ? 2) Were the IMS basic functions respected? 3) The basic logics of IMS 4) The “Bretton Woods I” system, and its 3 defects 5) The “floating dollar-standard” and its conditions 6) The move to a managed float under $ standard 7) The “Bretton Woods 2” system and the monetary wave before the crisis 8) The present global monetary wave: Bretton Woods 3 9) Proposals for reform? 1.
    [Show full text]
  • Oecd Development Centre
    OECD DEVELOPMENT CENTRE Working Paper No. 162 (Formerly Technical Paper No. 162) FINANCIAL CRISES AND INTERNATIONAL ARCHITECTURE: A “EUROCENTRIC” PERSPECTIVE by Jorge Braga de Macedo Research programme on: Globalisation and Governance August 2000 CD/DOC(2000)6 TABLE OF CONTENTS PREFACE ................................................................................................................ 5 RÉSUMÉ .................................................................................................................. 6 SUMMARY ............................................................................................................... 7 I. INTRODUCTION............................................................................................... 8 II. THE “EUROCENTRIC” PERSPECTIVE DEFINED .......................................... 10 III. LESSONS FROM THE EMS............................................................................. 13 IV. FINANCIAL CRISES IN EMERGING MARKETS.............................................. 19 V. INTERNATIONAL FINANCIAL ARCHITECTURE ............................................. 24 VI. CONCLUSION .................................................................................................. 27 NOTES ..................................................................................................................... 28 BIBLIOGRAPHY ...................................................................................................... 32 OTHER TITLES IN THE SERIES/AUTRES TITRES DANS LA SÉRIE ..................
    [Show full text]
  • A Model of the International Monetary System
    A Model of the International Monetary System Emmanuel Farhi Matteo Maggiori Harvard University NBER & CEPR 2016 Bank of Canada Annual Conference The International Monetary System • Defining features: • Exchange rate regime: fixed, floating, managed • Financial architecture: international institutions (WB, IMF), LoLR, risk-sharing agreements (reserve sharing agreements, swap lines) • Provision and use of international reserve assets • Fundamental questions: • Hegemonic vs. multipolar system • Determinants of reserve status • System stability • Adequate supply of reserve assets • Gold-Exchange standard, floating exchange rates • Little formal analysis The International Monetary System: History and Thought Genoa Britain US BreCon US Conference Goes off Goes off Woods Floats Against Gold Gold Gold Conference Nixon Shock Gold Gold Exchange BreCon FloaHng Standard Standard Woods Exchange Rates £ & $ $ $ 1870 WWI 1920 1931 1933 WWII 1944 1971 1973 Triffin Eichengreen Dilemma MulHpolar World? (1961) (2011) Nurkse Instability Keynes (1944) Kindelberger Gold Scarcity World Banker (1923) (1961) Some reflections on the International Monetary System • Keynes (1923): argued against the return to gold standard at pre-WWI parities because scarcity of gold would have caused recession • Nurkse (1944): argued that multipolar systems are inherently unstable since investors attempt to coordinate on which country, the US or the UK, will be the ultimate safe asset provider • Triffin (1961): the system is fundamentally unstable since the US cannot simultaneously accommodate the demand for reserve assets and maintain a credible conversion of dollar to gold • Kindelberg (1963): the system is stable, the US acts as a banker to the world, liabilities are backed by assets • Eichengreen (2011): argues that a multipolar world (US, China, Europe) is no less stable.
    [Show full text]
  • BIS Working Paper No. 684: “Triffin: Dilemma Or Myth?”
    BIS Working Papers No 684 Triffin: dilemma or myth? by Michael D Bordo and Robert N McCauley Monetary and Economic Department December 2017 JEL classification: F32, F33, F34, F41, H63. Keywords: Triffin dilemma, Foreign exchange reserves, Gold, US current account, Safe assets, World’s banker. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2017. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) Triffin: dilemma or myth? Michael D Bordo and Robert N McCauley1 Abstract Triffin gained enormous influence by reviving the interwar story that gold scarcity threatened deflation. In particular, he held that central banks needed to accumulate claims on the United States to back money growth. But the claims would eventually surpass the US gold stock and then central banks would inevitably stage a run on it. He feared that the resulting high US interest rates would cause global deflation. However, we show that the US gold position after WWII was no worse than the UK position in 1900. Yet it took WWI to break sterling’s gold link. And better and feasible US policies could have kept Bretton Woods going.
    [Show full text]
  • Overcoming the Triffin Dilemma Today: a Plan for a Stable International Financial Architecture Christian Ghymers, RTI/UCL,1 and IRELAC2, Belgium
    Overcoming the Triffin dilemma today: A plan for a stable international financial architecture Christian Ghymers, RTI/UCL,1 and IRELAC2, Belgium The Triffin dilemma More than 50 years ago, the Belgian-American economist Robert Triffin (1911– 1993) denounced the dangerous incoherence of the “dollar system”, not the general peg-regime against the dollar created in Bretton Woods 1944, but more generally the use of a national currency as the main international reserve currency. His warning was coined the “Triffin dilemma” expressing merely that due to the inner logics of a currency to be a debt-at-sight, any system based mainly on the use of a national currency for supplying international reserve assets to the rest of the world, was doomed to conflicting objectives leading inevitably to generate global macroeconomic instability. The reason is the inescapable dilemma the issuer of this currency faces between either going ever deeper into debt in order to satisfy the growing world demand for liquidity, with the danger that this will undermine its creditworthiness on the one hand, or failing to satisfy this demand by giving priority to its creditworthiness exposing the world to a reserve shortage with a consequent conflictive deflation on the other hand. The essential message Triffin tirelessly sent to economists and policymakers is that once a national currency is used as foreign reserve by many other countries, asymmetries are resulting that create biases in the policy-mix of the issuer of reserves not only by exempting it from external monetary discipline, but also by provoking significant spillovers on global liquidity conditions, which tend to become suboptimal and unmanageable.
    [Show full text]