Twenty years ago, in the discussion of “monetary policy challenges” by central banks and policy makers, the arguments of everyone’s research were still in the stages of “inflation” and “flexible exchange rate”. Nowadays, people have finally proposed to use digital currency as a solution. A new way of monetary dilemma.
On August 23, at the Federal Reserve's annual Jackson Hole Symposium, Bank of England Governor Mark Carney published an article entitled "The current monetary policy in the international monetary and financial system is facing increasingly severe Challenge " speech.
In this speech, Carney summed up the shortcomings of the International Monetary Fund and the instability of the dollar-dominated monetary system, saying that “economic policy uncertainty is increasing, protectionism is on the rise, and people are worried about policy space. Limited, further negative shocks cannot be fully offset, and these factors are exacerbating the anti-inflationary tendencies of the global economy."
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In response, Carney proposed a radical proposal to overhaul the global financial system, which will eventually replace the US dollar as a reserve currency with a virtual currency like Libra.
The following is a summary of the key features of Carney:
Traditional consensus has been difficult to sustain
For decades, the mainstream view has always believed that countries can achieve price stability and minimize excessive output changes by adopting flexible inflation targets and floating exchange rates. It is believed that the results achieved by policy coordination are only limited at best. The solution is for countries to maintain domestic order.
But for several reasons, this consensus is increasingly untenable.
First, in the past few decades, international connections have increased dramatically, increasing the importance of cross-border spillovers. Growing cross-border trade means that external demand has a greater impact on domestic resource allocation and therefore leads to inflation. The integration of low-cost producers into the global economy has created a steady anti-inflationary tendency through direct impact on prices.
Second, the growing dominant currency pricing (DCP) is reducing the shock absorption characteristics of flexible exchange rates and changing the volatility trade-offs of inflation output faced by monetary policymakers.
At present, the dominant currency pricing is widespread (partly because of the growth of the supply chain), leading to deviations from the single price law and the imbalance of trade conditions among countries. In international trade invoices, the US dollar accounts for at least half of the total, which is the preferred currency, about five times the United States' share of global merchandise imports and three times the United States' share of global exports.
The resulting dollar-denominated import price viscous means that regardless of the exporting country and importing country, the rate of change in the exchange rate of the US dollar is high, and the rate of transmission of the non-dominant currency is negligible. Therefore, the import price has not been effectively adjusted.
The most fundamental thing is that the unstable asymmetry of the core of the International Monetary Fund is intensifying. Although the world economy is being reordered, the dollar remains as important as the Bretton Woods system collapsed .
Currently, the International Monetary Fund is structurally reducing the global equilibrium interest rate as follows:
1. In the context of imperfect global global financial safety nets, emerging market countries defensively accumulate safe dollar asset reserves, contributing to global savings surplus
2. Reduce the scale of sustainable cross-border flows, thereby reducing potential global growth rates
3. Increase the downward slope of potential economic outcomes
It is clear that the core structural imbalances and protectionism of the International Monetary Fund are threatening the global development momentum.
Despite the global economic transformation, the US dollar still dominates the IMF. The data shows that during the Latin American debt crisis, emerging market economies accounted for slightly more than one-third of global GDP. Since the Fed’s last tightening of monetary policy, their share of global economic activity has risen from around 45% to 60%. By 2030, this proportion is expected to rise to around three-quarters. At the same time, although the United States' share of global GDP has fallen rapidly, the US monetary policy has tightened its spillover effect on foreign GDP, which is now twice the 1990-2004 average.
Facts have proved that the smooth operation of the traditional consensus is based on the inequality faced by emerging market economies, and this abnormal development is obviously not desirable.
Change the three stages of the rule
In the face of this situation, how should countries' monetary policies change?
In the short term, central banks must do everything they can to make the cards they have already played.
This means taking full advantage of flexibility in flexible inflation targets. In order to maintain the basic credibility of its framework, it is best to proceed transparently, allowing central banks to explain why they have to make a specific trade-off between price stability and output volatility.
The core members of the International Monetary Fund need to absorb spillovers, just as the Fed has been doing. More broadly, central banks need to better understand the scale of global risks and their impact on monetary policy.
We cannot all rely on exports to get rid of these challenges. Coordination is beneficial in the global liquidity trap, and other policies – especially fiscal policy – can play a definitive role. Taking action earlier and more forcefully will increase their effectiveness.
In the medium term, policymakers reshuffle by reforming existing physiques .
In other words, we need to improve the structure of the current International Monetary Fund . This requires ensuring that institutions at the heart of market finance, especially open-end funds, remain resilient throughout the global financial cycle. It needs to better monitor cross-border spillovers to guide macroprudential and to guide capital flow management measures in extreme cases. It also emphasizes the importance of rebuilding a sound global financial safety net.
Emerging market economies can increase sustainable capital flows by addressing the following “pull” factors:
1. Strengthen the credibility of monetary policy, including ensuring the business independence of the central bank;
2. Enhance the bank's ability to resist risks;
3. Deepen the domestic capital market and reduce the dependence on foreign currency debt;
4. Expand the scope and application of macroprudential tools to prevent excessive credit growth during the boom period. A study by the Bank of England found that emerging market countries tightened prudential policies and curbed the spillover effects of US monetary policy by about a quarter.
In the long run, we need to change the rules of the game.
It should not be imagined that the IMF could be reformed overnight, nor should it be imagined that market forces could force the rapid conversion of reserve assets. But it is wrong to accept the status quo as rashly. Risks are accumulating and are structural. As Rudi Dornbusch warned: “In economics, things happen longer than you think, and then faster than you think.”
When the change comes, one currency hegemony should not be exchanged for another currency hegemony. No unipolar system is suitable for the multipolar world. We should consider every opportunity, including the opportunities that new technologies bring, to create a more balanced and effective system.
A multipolar global economy needs a new IMF to reach its full potential
While this concerted effort can improve the functionality of existing systems, ultimately, a multipolar global economy requires a new IMF to reach its full potential.
This is not easy.
Given the strong complementarity between the international functions of money, the transition between global reserve currencies is rare, and the international function of money helps to consolidate the dominant currency.
The currency, the yuan (RMB), which is most likely to have the status of a real reserve currency, has a long way to go before it is ready to take over this responsibility.
Looking back at the global currency transition of the British pound to the US dollar after the First World War, we can find problems that may arise during the transformation of foreign exchange reserves. Two competing reserve money supply countries undermined the stability of the international monetary system, coupled with a lack of coordination among monetary policy makers, leading to a lack of global liquidity, exacerbating the severity of the Great Depression.
Therefore, as time goes by, although the appreciation of the renminbi may provide the second best solution to the current problem, the best solution is to establish a multi-pole system.
The main advantage of the Multipolar International Monetary Fund is diversification. Multiple reserve currencies will increase the supply of safe assets and reduce the downward pressure on the global equilibrium interest rate from asymmetric systems. As many countries compete to issue global security assets, the security premium they receive should fall.
A more diverse IMF will also reduce spillovers in core countries, thereby reducing the synchronization of trade and financial cycles. This will in turn reduce the fragility of the system, increase the sustainability of capital flows, and push up the equilibrium interest rate.
Libra-like digital currency will be a better choice
Although the possibilities of the current multi-polar IMF seem remote, technological development offers the possibility of such a world. Such a platform will be based on virtualization rather than physics.
History shows that the rise of the reserve currency is based on its role as a medium of exchange, which reduces the cost of international payments and increases the convenience of international payments. The additional function of money—as a unit of account and wealth storage—appeared later and reinforces the motive for payment.
Retail transactions are increasingly happening online, rather than on the street, through electronic payments in cash. The relatively high cost of domestic and cross-border electronic payments is encouraging innovation, and new entrants are applying new technologies to provide lower-cost, more convenient retail payment services.
One of the most striking of its kind is Libra, a new payment infrastructure based on international stability, supported entirely by reserve assets in a basket of currencies such as the US dollar, the euro and the pound. It can be exchanged between users on the messaging platform and retailers participating in it.
Libra must address many fundamental issues, from privacy to AML/CFT and operational resiliency. In addition, depending on its design, it may have a substantial impact on monetary and financial stability.
The Bank of England and other regulators have made it clear that this is different from social media standards. Moreover, after these technologies were adopted by billions of users, regulation has only just begun, and the contract terms of any new systemic private payment system must take effect long before the launch.
Therefore, whether this new comprehensive hegemonic currency (SHC) is best provided by the public sector, perhaps through the central bank's digital currency network, is an open question.
Even if the original version of the idea proved to be imperfect, the concept is interesting. Given the magnitude of the current challenges facing the IMF and the risk of transitioning to a new hegemonic reserve currency such as the renminbi, it is necessary to consider how the IMF 's SHC can support better global outcomes.
Advantages of comprehensive hegemonic currency
Comprehensive hegemonic currency (SHC) can curb the strong influence of the dollar on global trade .
If the trade share settled in SHC rises, the spillover effect of the US shock through the exchange rate will be weakened, and the trade between countries will become less synchronized. For the same reason, global trade will be more sensitive to changes in the state of other currencies in a basket of currencies that support SDRs.
If a new financial structure is formed around the new SHC and replaces the dominance of the dollar in the credit market, the impact of the dollar on the global financial situation may also decline similarly. By reducing the impact of the US on the global financial cycle, this will help reduce the volatility of capital flows to emerging markets.
The widespread use of SHC in international trade and finance will mean that the currency that makes up its currency basket will gradually be seen as a reliable reserve asset, which will encourage emerging market countries to diversify their holdings of safe assets and reduce their Dependence. This will ease the downward pressure on equilibrium interest rates and help alleviate the global liquidity trap.
This will increase the supply of safe assets and mitigate the downward pressure on the global equilibrium interest rate from asymmetric systems. A more diversified IMF will reduce the synchronization of trade and financial cycles, reduce the fragility of the system, increase the sustainability of capital flows, and push up the equilibrium interest rate.
Although the possibilities of the current multi-polar IMF seem remote, technological development offers the possibility of such a world.
Finishing: Sharing Finance Neo