Abstract
Abstract Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of dollar’s double role of national and international currency. This is the Triffin dilemma. The paper shows how it works through three examples: price of commodities, dollarization, and the international financial position of the US. And it makes a proposal to solve these issues, creating a more stable monetary system. In particular, it suggests the creation of an international monetary system of block regional currencies. Globalization and regionalization should be the two forces leading towards the new monetary system. The US and Europe should consider to adopt the same currency through a system of fixed exchange rates (global currency). This currency should perform its duty of anchor of the system, reducing global imbalances and gyrations in price of commodities. Developing countries, by contrast, should create regional monetary unions (regional currencies), preserving the real exchange rate as shock absorber, but gaining in terms of time consistency and credibility.
Highlights
In difficult time people are allowed, even encouraged, to think the unthinkable
The other costs due to dollarization would be avoided, since seignorage could be proportionally distributed to the Members of the union, the exchange rate could still serve as a shock absorber, and the sovereign central bank could act as lender of last resort
The above section showed how dollarization, commodity prices and the international financial position of the US represent the main flaws of the current monetary system
Summary
In difficult time people are allowed, even encouraged, to think the unthinkable. The ongoing financial crisis certainly represents a good opportunity to give vent to your imagination. While benefiting from a widely accepted reserve currency, the globalization suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods regime suggests the costs of such a system to the world may have exceeded its benefits (Xiaochuan, 2009). Zhou Xiaochuan (2009), governor of the People Bank of China, recently emphasized these flaws and suggested to replace the dollar as reserve currency with the SDRs issued by the IMF. Imagining a world without political constraints, globalization and regionalization should be the two forces leading towards the new monetary system. To the best of my knowledge, nobody noted that to eliminate the temptation of following national interests it is necessary to give up the national ones and not to fix their exchange rates against the new global unit of account. The second section is devoted to my proposal and emphasizes costs and benefits, its functioning and discusses its political feasibility
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