The future of the global financial system

This paper argues that economic growth is fundamentally constrained from the supply side, which is why it is desirable to maintain the constraints on balance-of-payments deficits that are provided by limited reserves. Reform of the international monetary system could lead to more harm than good if it undermines the discipline provided by reserves. The paper nonetheless identifies a number of reforms that it argues would be compatible with the maintenance of a globalized world consisting of market economies and the sovereignty where every country needs to see itself as a net gainer from a reform package. The reforms advocated are: introduction of "reference rates" to provide a guide for the exchange rates that the official sector believes consistent with macroeconomic equilibrium in the medium term; using the World Economic Outlook to assess progress toward the payments objectives that underlie the reference rates; adoption of an actively anti-cyclical stance by the IMF; employment of instruments like unremunerated reserve requirements to repel excessive capital inflows when these threaten emerging markets; and a new allocation of special drawing rights.