2009 Reports

A Modest Proposal for International Monetary Reform

Greenwald, Bruce C.; Stiglitz, Joseph E.

An ideal system of international payments should be characterized by stability and balance: stability in exchange rates and the absence of sudden crises, and balance in the sense that individual national economies should suffer neither from the deflationary effects of chronic external deficits nor the distorting consequences of chronic external surpluses. Both requirements are essential to the efficient international movement of capital. Yet neither requirement appears to have been met by the current dollar-based reserve currency system. Recurrent crises in Asia, Latin America and Eastern Europe, and chronic and growing U.S. payments deficits (with their associated deflationary impact) are long-standing characteristics of the current system. This chapter argues that the problems just described are fundamental aspects of the present system and that, without reform, they will continue to plague the global economy. However, a simple set of institutional reforms would go a long way toward alleviating these difficulties. In order to understand the need for and nature of these reforms, we begin by analyzing the dynamics of the current system using a simple global macroeconomics framework. Within this context, we examine a number of proposed explanations for current imbalances and ultimately focus on a small number of potentially responsible factors. They bear a striking similarity to those which Keynes cited in connection with the failure of the pre-Bretton Woods system. The chapter then lays out reforms designed to alleviate these problems. Finally, it ends with a broader analysis of the costs and benefits of such a reformed system.