The International Monetary System and the Available International Policy Options for Emerging Countries

Abstract

This paper discusses how the available international monetary policy options for emerging countries changed over time during the post-Bretton Woods era in view of the trilemma. Upon the liberalization of the emerging countries' capital account, emerging countries suffered from excess volatility and economic crisis. They piled up reserves to survive in the region of free international capital mobility, but further reserve accumulation might not be sustainable in the future. Preventing the negative consequences of highly volatile international capital flows by providing global liquidity properly will dictate the available policy combinations for emerging countries. A fundamental reform on the international monetary and global liquidity provision systems will assist emerging countries in coping with liberalized capital accounts. However, the implementation of such a reform will take a long time. In this case, properly developed financial safety nets may help emerging countries in the interim. Otherwise, emerging countries have no choice but to impose capital controls. Advanced countries should understand the emerging countries' options and strive with these countries to implement an international monetary system reform that can reflect the recent worldwide developments.Keywords: Post-Bretton Woods system, Capital controls, International monetary system, Reform, Financial safety nets, Trilemma, Emerging countries, International capital mobility, Reserve hoarding, Global liquidity provisionJEL Classification: F33, F38, F42, F55I. IntroductionMore than 40 years had passed since the collapse of the Bretton Woods system. Since then, the post-Bretton Woods system had faced various challenges. The imbalanced trade among the United States, Japan, and Germany led to the Plaza agreement. Many emerging countries suffered from economic crises after liberalizing their capital accounts. To prevent another economic crisis, these countries piled up huge amounts of foreign exchange reserves, and this action caused a big international controversy. The recent global financial crisis, which occurred with the global imbalances, generated debates on international monetary system reform.The international monetary system limits a set of available international monetary policy options for each country. The exchange rate was fixed under the Bretton Woods system, which prompted the need to limit the international capital mobility to obtain monetary autonomy in view of the trilemma. The available policy options for each country change along with the economic environment. If the capital account is liberalized under a fixed exchange rate system, each country has to give up its monetary autonomy in view of the Trilemma.The post-Bretton Woods system imposed new restrictions on each country's available policy options. Emerging countries experienced substantial changes in their economy and in their available policy options after the collapse of the Bretton Woods system. Moreover, as emerging countries grew fast, their economic actions started to affect other countries and the entire system.This study discusses how available international monetary policy options for emerging countries changed over time during the post-Bretton Woods era in view of the trilemma. The available policy options for emerging countries changed along with their economic environment, and this occurrence increased the need for the reform of the international monetary system. After summarizing the current progress in the international monetary system reform, this study suggests that the evolution of the international monetary system will have an important implication on the available policy options of emerging countries.Section II explains the trilemma and the post-Bretton Woods system. Section III discusses how the changes in the economic environments affected the available policy options for emerging countries. Section IV summarizes the current progress in the international monetary system reform. …