Copyright
© 1992 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
Policy issues in the evolving international monetary system / Morris
Goldstein … [et al.].
p. cm.—(Occasional paper / International Monetary Fund,
ISSN 0251–6365 ; no. 96)
Includes bibliographical references.
ISBN 1–55775–234–6
1. International finance. 2. Monetary policy. 3. Fiscal policy. 4. Monetary unions. I. Goldstein, Morris. II. Series: Occasional paper (International Monetary Fund); no. 96.
HG3881.P65 1992
332’.042—dc20 92-17080
CIP
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Contents
Preface
Part I Mechanisms for Promoting Global Monetary Stability
Morris Goldstein and Peter Isard
I. Introduction
II. Developments in World Economy and Implications for the International Monetary System
Changes in Relative Economic Size
Relative Inflation Performance
International Use of Currencies
Patterns of Regional Integration
Provision of International Liquidity
Implications for Evolution of the System
III. Problems with Present System
Undisciplined or Ineffective National Policies
Fiscal Policies
Monetary Policies
Structural Policies
Excessive Swings in Real Exchange Rates
Limited Credibility in Efforts to Manage Exchange Rates
Deficiencies in International Liquidity System
IV. What Can Be Done?
Measures to Strengthen National Policymaking
Fiscal Policy Reforms
Monetary Policy Reforms
Structural Reforms
Efforts to Enhance Multilateral Surveillance and Policy Coordination
Changes in Nature of Exchange Rate Commitments
References
Tables
Section
II 1. Relative Economic Size
2. Consumer Price Inflation Rates Among Industrial Countries, 1954–90
3. Wholesale Price Inflation Rates Among Industrial Countries, 1954–89
4. Consumer Price Inflation Among Developing Countries, by Region, 1971–90
5. Selected Indicators of International Use of Currencies
6. Distribution of Exports by Destination, 1989
7. Distribution of Imports by Origin, 1989
III 8. Government Saving in Industrial Countries, 1967–90
9. Relative Volatility of Exchange Rates, 1973–90
Charts
Section
III 1. Volatility of Nominal Exchange Rates, 1961–90
2. Nominal Exchange Rate Indices, 1975–91
3. Effective Exchange Rate Indices, 1975–90
4. Cumulative Changes in Effective Exchange Rate Indices, 1975–90
Part II Issues in the Operation of Monetary Unions and Common Currency Areas
Paul R. Masson and Mark P. Taylor
I. Introduction
II. Monetary Policy Issues
Facilitating Transactions and Ensuring Price Stability
Monetary Policy Institutions in a Currency Union
Seigniorage and the Inflation Tax
Conclusions
III. Traditional Criteria for Successful Currency Unions
Factor Mobility
Openness and Regional Interdependence
Industrial and Portfolio Diversification
Wage and Price Flexibility
Overview of Traditional Criteria and Response to Shocks
Conclusions
IV. Fiscal Policy Within Currency Areas
Spillovers from National Fiscal Policies
Prospects for Budget Discipline
Incentives for Excessive Deficits
Government Borrowing in Fiscal Federations
Fiscal Flexibility and Interregional Transfers
Conclusions
V. Convergence Issues
Real and Nominal Convergence
Conclusions
VI. Monetary Union—Transitional Issues
European Monetary Union
The Delors Plan
Speed of Transition
Sources of Instability in Transition
Currency Substitution
Speculative Attack
Arguments For and Against Rapid Transition
The Hard ECU Proposal
Conclusions
VII. Concluding Remarks
References
Tables
Section
III 1. Selected Country Groupings: Intra-Area Trade as Share of Total Trade
2. Selected Industrial Countries: Shares of Exports by Commodity Categories
3. Selected Industrial Countries: Shares of Production by Sector, 1986
Charts
Section
III 1. Dispersion of Unemployment Rates
2. Macroeconomic Stability of EMU
V 3. ERM: Maximum and Minimum Rates of Inflation
4. Dispersion of Real Per Capita Output
The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1991–92 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Preface
This study, which was prepared in the Research Department of the International Monetary Fund, addresses a number of major policy issues in the evolving international monetary system. Part I focuses on mechanisms for promoting global monetary stability, with particular emphasis on ways to strengthen policies and coordination among large countries that have demonstrated the ability to provide nominal anchors for the world economy. Part II focuses on issues in the operation of monetary unions and common currency areas among groups of countries, including some issues that relate specifically to proposals for extending the European Monetary System in the direction of economic and monetary union.
Because this study was prepared during the first half of 1991, it does not take account of the agreement reached at Maastricht by countries of the European Community in December 1991. That agreement sets out a timetable for proceeding to monetary union by January 1, 1999, as well as criteria for determining which countries will do so. Nevertheless, some of the considerations raised in Part II of the study provide background for understanding the implications of economic and monetary union in Europe.
The authors of Part I are Morris Goldstein, Deputy Director of the Research Department, and Peter Isard, Advisor. Part II was written by Paul R. Masson, Chief of the Economic Modeling and External Adjustment Division, and Mark P. Taylor, Senior Economist in that division. Numerous colleagues provided comments and advice. The paper was edited by Elin Knotter of the External Relations Department. The authors alone are responsible for the study; the opinions expressed are theirs and do not necessarily reflect the views of the IMF.