International Monetary Economics - Essay Example

? INTERNATIONAL MONETARY ECONOMICS International monetary economics There has been a heated up debate the current issues arising on currency systems design internationally. The meltdown of the international economic and financial systems can be blamed on two major factors: macroeconomic balances and regulatory failures. Seemingly, global imbalances will continue for some time. Dealing with this issue is difficult to achieve as most of the economies are run by external focus on international consistency.A call for cooperation and coordination is of great need. The international systems of finance have identified faults in an attempt to deal with imbalances. Therefore, there is a necessity of change. For this issues arising to be resolved, the whole system have to be reformed with much consideration on current international economics. The main purpose for addressing this paper is to spot the lessons that have been learnt from the international systems currency b policy makers. It further tries to apply what has been learnt to solve the euro crisis. The paper focuses on international system of finance, the role it plays in the ongoing current crunch and in the prevention and solving future ones. Generally, crisis recurs but their rate of occurrence and results can be mitigated and managed. Introduction The exiting crisis in the international scene may be ultimately bottoming out. From the occurrences of these crises, the policymakers must consider on how to recover from the crises.As the effects of these crises take a stride of time to resolve, there are lessons learnt by policymakers during this time.There has been a heated up debate the current issues arising on currency systems design internationally.The meltdown of the international economic and financial systems can be blamed on two major factors: macroeconomic balances and regulatory failures.The clarity that international system of finance was not ready for dealing with the problems of finance became clear. The moment the crisis started, the concentration was majorly on failures of regulation. As actions unfolded, there was an emergence of some extent of consensus. Both factors werenot only considered determinants but an interaction between them catalyzed the effects of the crunch. The shortcomings of international systems of finance are noticeable in the current crisis. If one talks about the consequences, solutions and causes to the crisis, it is not possible to think of adaptation of international systems of finance to international economic configuration. In fact, from the moment the institution of Bretton woods was created, at the time crises were faced by most countries, there was discussion by policymakers on those institutions’ adequacy, possible alterations and their toolkits’ improvement. The main reason for this addressing the paper is focus on international system of finance, the role it plays in the ongoing current crunch and in the prevention and solving future ones. Generally, crisis recurs but their rate of occurrence and results can be mitigated and managed. Lessons learnt For more than two years in the past, the international economy has experienced the most extended crisis from the time of great depression. Turmoil in finance reached its worst level as 2008 fell. Before then, it had begun in the housing market of the U.S in 2007 during the summer time. It then spread gradually to the international economy and most parts of America. The channel through which the crisis followed is length. To start with, it went through the linkages of financial sectors like the investments on cross-border on derivatives ofcredit.In most part of 2008, growth of the economy seemed held up, specifically in market countries that emerged. These markets gave rise to decoupling debate. Nevertheless, towards the end of the same year, spill of the financial turmoil began to the real economy. This led to a dramatic flop in economic activity, international demand and international trade all over the globe. Presently, the crisis in progress can be related to other crises. Although, it can be compared, it is different in various was. It similarity comes in when compared to the crisis that have hit market economies that have emerged in the last decade. This came about due inadequate confidence in payment of debt b these markets which extracted investors from lending. This fear gained more fulfillments and made no debt to be issued out. To the surprise of these markets, this issue sprawled to the entire economy hence led to contraction of the economy (Johnson, 2009). Besides that, the crisis is also unique in a way. No country escaped the consequences after many years. This was produced from the economies that were advanced. From the time of profound incorporation of financial markets and international trade, it was the first. It emerged with complex and new instruments. Lastly, the problems that emanated were not because of an explicit pledge to a quasi-fixed or a fixed insignificant anchor which led to the collapse of currencies. What majorly triggered the present crisis was failure in the European market of mortgages. This risk made its way to non-transparent and complex derivatives. A good number of economists explain the lack of risk management; distorted incentives and lax supervision to have triggered the economy’s sector of finance to increasingly take large, poorly assumed exposures of risk that were financed through reliance and high leveraged stands on large short run funding. Nevertheless, it was not likely that the entire issue would develop into the same degree had the environment of macroeconomics not been categorized by shooting prices of assets, falling interest rates and huge imbalances in intake and investment in America. This entire seemed to be maintained by excesses in savings in Asian countries and in countries that produce oil (Visco, 2009). Combining the problems mentioned above catalyzed the systems of international finance. Though in the past problems of severe crisis have been dealt with, none had a devastating consequence like this one. Therefore, recent efforts to resolve the crisis were not wide ranging as they are now. To add to that, the efforts prevention of crisis during the past were aimed at reforming the new economic markets that emerged. This makes it clear that international systems of finance is moving due to its evolution on how it respond to crisis. The conference held in Paris that advocated for peace, 2nd world war and great depression were very influential to the work and design of after war international systems of finance (Boughton 2004) The form that these institutions were to take was greatly influenced by creation of multifaceted institutions of finance. The occurrence of these events altered their activities in various ways in order to remain relevant with the change which took place.Nevertheless, the IFS could not cope with the pace of financial and global changes. Amongst these changes were, creation of international financial markets that played a major role in modeling international systems of finance. At the time Bretton woods came into existence, there were limitations in the scope of capital flows. In the past few years, a time referred to as period of great moderation overtaken alternation between bad and good times (Resende, 2009). International monetary funds’ role was in question while private sector looked adequate to provide for liquidity needs of the country. Nevertheless, great moderation period masked the slow merging of problems in the middle of international systems of finance. This was because the financial imbalances raised concerns. At the start of 2008,there was a tremendous change. There was a well set roadmap to resolutions of the problems that had been faced by economies. These resolutions were inclusive of development of a system with procedures that were disciplined, rethinking IMF’s role and strengthening regulation and supervision of financial institutions and markets. As much as one can say that the present situation had been contained, the one that was ahead was intimidating (Boughton, 2000). Up to date the main aim of policymakers in economic markets is to gain external confidence. Consequently, the policy of macroeconomics could be recurring. From the crises that took place in the 1990s, most of economic markets took vital measures to make their economies stronger. They implemented more prudential financial and regulation oversight. They also made some improvements on their fiscal positions and current accounts. They countered their liabilities and advanced in their monetary frameworks. Another vital step was accumulating significant international reserves which resulted into mitigation of risk aversion to economic markets. The reforms consolidation created a conducive atmosphere for developing local capital markets. This enabled private and public sectors to locally finance themselves as they depend less on capital from outside. The reduced vulnerability to foreign financing helped economic markets to well prepared for the present crisis. Lessons had been learnt from limitation of external restriction to approaches of risk. Economic markets came up with an attitude that was cautious for avoidance of surprise by a drop in investors’ confidence. According to them, for one to get advantage from commercial and world’s financial expansion, it was essential to adopt a reforms and helpful role to lug by change in economies of the world. Local growth depended on growth of foreign demand (Resende, 2009). Hence the markets that emerged were capacitated to implement measures that did not only limit crisis negative effect but also reduction of effects from external forces (Truman, 2009). Nevertheless, only a few countries were equipped in countering the crisis. Many of them depend highly on external capital; especially in changed economies were not able to deal with the consequences of slow down. Therefore, they had to opt for assistance of IMF. Other countries acted as if they had no limitations to their growth. From the time dot com bubble worsened off, they had faced problems of inflation and lower rates of interests. There was increasingly high consumption that was sustained by reserves and surplus accumulation of economies that emerged. Where there were low return and abundant liquidity, countries that were developed invested their funds in emerging states that seemed to be developing and stable and locally built derivatives for increased returns. Excesses in liquidity aided in the building of an estate bubble with instruments of security spreading risks. The economic moneyflow pressurizes currencies. As many economic markets’currencies increase in value, others dodged it by pegging themselves to the dollar. The savings of the world were focused on emerging economies. These economies were like china, and the world’s consumption majorly depended on US. US expenditures propelled the growth of the world that financial innovations financed. To avoid crisis in future, a way to deal with the imbalances was to deal with exchange rates. Applications to current euro crisis As it was discussed earlier, the crisis had been brought about by imbalances in the world and was triggered and infected by loopholes in supervision and regulation in financial markets. The international systems of finance did not manage the crisis or counter it. The world economy of today is very different to the initially designed system of finance. For the current crisis of euro, should adopt reforms to deal with the problems of global imbalance. Sharing and cooperation of adjustment burden are essential. The alternative solution should be increasing saving rates gradually and a gradual increment in consumption. An adjustment in the exchange rates may also be essential. Another way to curb the crisis that has been facing the euro is to improve the surveillance of IMF to improve its framework on dealing with the crisis. This can only be done by influencing government’s action (Callaghan, 2009). Lastly, the euro crisis should solvethis by adjusting the voice and quotas in economic institutions. Reference Boughton, J.M., 2000. From Suez to Tequila: The IMF as a Crisis Manager. Economic Journal. Callaghan, M., 2009. Reform of the International Financial Institutions. In Workshop on the Global Economy ? Causes of the Crisis: Key Lessons. Mumbai, 2009. Collyns, C., 2009. In Search of a Smoking Gun: Macroeconomic Policies and the Crisis. In G?20 Workshop on the Global Economy ? Causes of the Crisis: Key Lessons. Mumbai, 2009. Eichengreen, B., 2009. Out of the Box Thoughts about the International Financial System. IMF Working Paper. Washington: IMF. Einhorn, J., 2009. The Fund could tame unfair competitive devaluation. Financial Times, 14 January. 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