“Global imbalances are back, and issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves—are on the front burner once again,” Mr. Strauss-Kahn said during a panel discussion on the international monetary system held at the IMF in Washington, DC. He said that “reforms to the international monetary system could both bolster the recovery and strengthen the system’s ability to prevent future crises.”
Mr. Strauss-Kahn emphasized three areas of reform in particular:
• Strengthening policy cooperation. Just as cooperation helped pull the global economy out of the crisis, Mr. Strauss-Kahn said further cooperation can now lay the foundations for more stable global growth. He pointed to the G-20’s Mutual Assessment Process (MAP)—as as an important first step toward creating more permanent frameworks for global policy cooperation—and to the IMF’s Financial Sector Assessment Programs and new reports on the spillover effects of countries’ policies on one another, as measures in train to strengthen surveillance.
• Reducing capital flow and exchange rate volatility. Countries’ policy responses to inflows of capital have an impact on other countries, Mr. Strauss-Kahn noted. He said that the Fund is looking at these issues including whether there was a need for globally agreed “rules of the road” for managing capital flows.
• Enhancing liquidity provision in times of extreme volatility. The global financial safety net has been strengthened in the wake of the crisis. Mr. Strauss-Kahn noted, for example, the introduction of the Flexible Credit Line and Precautionary Credit Line by the IMF. Another avenue worth exploring, he said, is how to “strengthen partnerships with regional financing arrangements.”
Potential Role of the SDR in strengthening the international monetary system. Over time, Mr. Strauss-Kahn said that there may be a greater role for the IMF’s international reserve asset, called the Special Drawing Right, or SDR, to contribute to a more stable monetary system. Although a number of obstacles remain in the way, increasing the global stock of SDRs could help alleviate global imbalances by reducing the need for an excessive buildup of reserves, he said. He added that issuing SDR-denominated bonds could create a potentially new class of reserve assets, and that use of the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility.
Mr. Strauss Kahn concluded that the reform of the international monetary system is not something academic or abstract—“It is linked to achieving the kind of well-balanced and sustainable recovery that the world needs and it is linked to preventing the next crisis.”