Money, politics and a future for the international financial system
In developing the architecture for a financial system, the challenge is to combine deregulation and safety nets against systemic failure with effective prudential regulation and oversight. The author analyzes three approaches to choosing an adequate regulatory framework for a financial system. a) Those most worried about panic and herd behavior tend to favor relatively extensive controls on financial institutions'activities, including controls on interest rates and on the volume and direction of lending. b) Those most concerned about moral hazard advocate abolishing controls and safety nets, seeing the solution is stronger market discipline and reduced powers and discretion for regulators. c) Mainstream opinion advocates a mix of measures, to both strengthen market discipline and improve regulatory oversight. The approach a county opts for depends on 1) which monetary and exchange rate regime it chooses, 2) whether it is more concerned about moral hazard or about panic and herd behavior, and 3) how the politics of reform shape its solutions. The author suggests a scenario for development of the global financial system over the next two or three decades that assumes that the final outcome will resemble the market solution - not because that is the optimal policy choice but because of how political weakness will interact with advances in settlement technology. In the author's scenario, the world moves toward a monetary system in which fixed exchange rate systems or de facto currency competition limit the power of central banks. This limits options for discretionary and open-ended liquidity support to help deal with systemic financial crises. The costs of inflexible exchange rates are moderated by new types of wage contracts, using units of account that are correlated with the shocks a particular industry or kind of contract faces -- thus maintaining the positive aspects of monetary systems with flexible nominal exchange rates. Mistrust in monetary authorities and the emergence of private settlements lead to a return of asset-backed money as the means of payment. The disciplines on financial systems come to resemble somewhat those of historical"free banking"systems, with financial institutions requiring high levels of equity and payments systems protected only by limited, fully funded safety nets.
|Date of creation:||30 Nov 1999|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
- Montiel, Peter J., 1993.
"Capital mobility in developing countries : some measurement issues and empirical estimates,"
Policy Research Working Paper Series
1103, The World Bank.
- Montiel, Peter J, 1994. "Capital Mobility in Developing Countries: Some Measurement Issues and Empirical Estimates," World Bank Economic Review, World Bank Group, vol. 8(3), pages 311-50, September.
- Ross Levine & Norman Loayza & Thorsten Beck, 2002.
"Financial Intermediation and Growth: Causality and Causes,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084
Central Bank of Chile.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
- Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
- White, Eugene, 1995. "Deposit insurance," Policy Research Working Paper Series 1541, The World Bank.
- Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
- anonymous, 1998. "Financial intermediation and growth," Economics Update, Federal Reserve Bank of Atlanta, issue Jan, pages 4.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2226. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.