Seminar Series: Abstract

3.30
November 04 2009
Seminar Room C

The Financial Crisis, Global Imbalances, and the International Monetary System
David Vines, University of Oxford; CAMA, ANU; & CEPR

This paper first describes the origins of the rules-based post-war international monetary system, and its replacement by the present non-system. It argues that this non-system is highly unstable. In particular, the combination of undervalued exchange rates in East Asia and the use by the US of monetary policy to ensure a steady growth in demand led to an outcome in which interest rates fell a great deal. In the presence of a highly leveraged financial system, such a large fall in interest rates created a very rise in the price of financial assets - in particular houses in the US. As a result the global economy became highly fragile. These high asset prices could not be sustained in the face of rising interest rates, and their collapse led to the present crisis. The paper then suggests how a return to a more rules-based international monetary system might help to guard against this fragility. It argues that the resulting rules will need to constrain excessively high savings in East Asia, and elsewhere, and that these rules will need to constrain excessive fiscal deficits in the US, and elsewhere. Such rules, if they operate effectively, will also constrain global imbalances.