Global Liquidity Challenges of the International Monetary System

International Monetary System (IMS) has been in the center of the heated debates over 70 years. Severe exchange rate mismatches and global liquidity problems not only led to global crises but also necessitated systemic changes. Notwithstanding several initiatives, setting proper exchange rate mechanisms has not been able to be realized. After the demise of the Bretton Woods system, an amorphous arrangement mechanism of exchange rates was established that led to further severe challenges globally. Moreover, rapid financial globalization and capital liberalization made exchange rates more vulnerable to external shocks. On the other hand, design flaws in global liquidity and reserve system seem hardly to be solved in the absence of the global lender of last resort and sustainable pro-cyclical liquidity provision. In this regard, the increasing scope of various components of the global financial safety nets raises serious concerns in terms of predicting their impact on global economic cycles. Additionally, major challenges associated with the global reserve system reveal that numerous economies still prefer to rely on national and regional-level frameworks rather than multilateral ones. The escalating tendency of such polarization within the global reserve system imposes serious sustainability challenges for the global economy. It should be emphasized that reforming the IMS is a dynamic process in which providing universal and ultimate solutions are far from reality. This study indicates that it would not be a smooth process to eliminate all these challenges that mostly stem from deep contradictions among nation-states' interests and multilateral frameworks.