February 10, 2011
The international monetary system (IMS) is the set of rules and institutions that shape how international payments are handled. In particular, one of its key purposes is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and sustain the conditions necessary for global financial and economic stability. In addition, the system is intended to facilitate the orderly adjustment to shocks. The International Monetary Fund (IMF) was set up after World War II to promote international collaboration on international monetary issues. By becoming a member of the IMF, a country commits to certain obligations found in the IMF’s Articles of Agreement. Among these obligations are collaborating with the Fund and with other Fund members to promote a stable system of exchange rates and conducting exchange rate, and domestic economic and financial policies in a manner that is consistent with this objective. In particular, members undertake not to impose restrictions on the making of payments or transfers for current international transactions without the Fund’s approval, to eschew exchange rate policies that give an unfair trade advantage, to hold regular consultations on exchange rate, macroeconomic and financial policies with the IMF, and to provide the IMF with the data that it needs to carry out its responsibilities. For its part, the IMF is tasked with maintaining the stability of the IMS through firm surveillance.
The current system—one with de facto dollar dominance, wide discretion for countries to choose their exchange rate arrangements and international reserve policies, and broad but uneven capital mobility—has allowed countries to pursue domestic policy objectives while underpinning strong growth in global trade in recent decades. It has also proven robust; indeed, the dollar’s role as a safe haven was underscored in the recent crisis in spite of its origins in the United States . However, it has a number of well-known weaknesses, including the lack of an automatic and orderly mechanism for resolving the buildup of real and financial imbalances; volatile capital flows and exchange rates that can have deleterious economic effects; and related to the above, the rapid, unabated accumulation of international reserves, concentrated on a narrow supply. Addressing these problems is crucial to achieving the global public good of economic and financial stability, by ensuring an orderly rebalancing of demand growth, which is essential for a sustained and strong global recovery, and reducing systemic risk. The IMF’s recent review of its mandate and resultant reforms—to surveillance and its lending toolkit—go some way towards addressing these concerns but further reforms are being pursued.