The global monetary and financial system hasn’t maintained financial stability as well as the Bretton Woods system of fixed currencies and needs to be reformed, according to a Bank of England research paper.
“Against a range of metrics, today’s system has performed poorly, at least relative to the BWS,” economists Oliver Bush, Katie Farrant and Michelle Wright said in the paper published in London today. “The key failure being the system’s inability to maintain financial stability and minimize the incidence of disruptive sudden changes in global capital flows.”
Regulators and authorities are redesigning the global financial system to withstand shocks after the collapse of Lehman Brothers Holdings Inc. in 2008 and the financial crisis. The frequency of banking and currency crises has been higher in the current system than in any previous international regime, such as Bretton Woods and the gold standard, and reforms are required, the economists said.
“The current system has coexisted, on average, with: slower, more volatile, global growth; more frequent economic downturns; higher inflation and inflation volatility; larger current account imbalances; and more frequent banking crises, currency crises and external defaults,” they said. “With the exception of inflation, the outcomes achieved during the BWS period were still better than those attained since 1990.”
The Bretton Woods conference in New Hampshire in 1944 established a system of fixed exchange rates that governed the post-World War II global economic system until its collapse in the early 1970s.
Today’s international monetary and financial system “has permitted large imbalances to build between countries, particularly over the past fifteen years or so,” the economists said. “Although imbalances reversed sharply in 2009, they remain high by historical standards.”
Reforms that could be pursued by individual countries include an improvement in domestic financial markets, better financial regulation and macroprudential policy frameworks, the elimination of data gaps, and greater flexibility in prices, wages and nominal exchange rates, the economists said.
In many cases, it will not be possible for individual countries to mitigate the underlying failures and international policy initiatives will be required, according to the paper.