Three Fundamental Problems of the International Monetary System
The international monetary system shows three fundamental problems .The first one, which was highlighted by John M. Keynes during the debates that led up to the Bretton Woods agreements, is that the present international monetary system has a bias against countries running balance of payments deficits (Keynes, 1942-43). The countries in external surplus have no strong incentive to adjust, and thus the burden of adjustment falls mainly on deficit countries. Adjustment generally takes place with a lag and rather abruptly when deficit financing suddenly dries out. The asymmetric adjustment tends to generate a global recessionary effect if the corrections that deficit countries need to adopt to balance their external ac¬counts do not find financing in adequate quantities, and if those adjustments are not offset by expansionary policies in surplus countries. This problem can be called the anti-Keynesian bias of the system.
The second problem, which has become known as the Triffin dilemma, after the pioneering work by Robert Triffin (1961, 1968), arises from the fact that an international reserve system based on a national currency (the U.S. dollar) has some inherent instabilities. In particular, the only way that the rest of the world can accumulate net assets in dollars is if the United States runs a balance of payments deficit. But that can lead to a loss of confidence in the dollar. By and large, this has led to strong cycles in the value of the main international currency and in the U.S. current account deficit, which strongly affects the rest of the world economy. More generally, global monetary conditions are largely determined by the monetary policy of the U.S., which is designed with no regard to its global repercussions. According to the reformulation as a “general dilemma” by the late Padoa-Schioppa (2011, pp. 63-64), “the stability requirements of the system as a whole are inconsistent with the pursuit of economic and monetary policy forged solely on the
The second problem, which has become known as the Triffin dilemma, after the pioneering work by Robert Triffin (1961, 1968), arises from the fact that an international reserve system based on a national currency (the U.S. dollar) has some inherent instabilities. In particular, the only way that the rest of the world can accumulate net assets in dollars is if the United States runs a balance of payments deficit. But that can lead to a loss of confidence in the dollar. By and large, this has led to strong cycles in the value of the main international currency and in the U.S. current account deficit, which strongly affects the rest of the world economy. More generally, global monetary conditions are largely determined by the monetary policy of the U.S., which is designed with no regard to its global repercussions. According to the reformulation as a “general dilemma” by the late Padoa-Schioppa (2011, pp. 63-64), “the stability requirements of the system as a whole are inconsistent with the pursuit of economic and monetary policy forged solely on the