monetary policy cooperation and coordination: an historical
TRANSCRIPT
Monetary Policy Cooperation and Coordination:
An Historical Perspective on the Importance of Rules
Michael D. Bordo and Catherine Schenk
Economics Working Paper 16112
HOOVER INSTITUTION
434 GALVEZ MALL
STANFORD UNIVERSITY
STANFORD, CA 94305-6010
May 6, 2016
This paper addresses the ongoing debate between those who advocate for central banks to take
coordinated action to reduce the international spillovers from their domestic policy actions; and
those who argue that the international spillovers from recent monetary policy actions reflect the
deviations from rules based monetary policy. We take an historical perspective and examine the
experiences of international cooperation and coordination since the late nineteenth century across
several exchange rate regimes: the classical gold standard 1880-1914; the Interwar gold
exchange standard 1924 to 1936; the Bretton Woods System 1944 to 1973; and the Managed
Float 1973 to the present. We find that in monetary regimes which are rules based cooperation
was most successful and less so in regimes based on discretion or poorly grounded rules. We
find less success for more elaborate schemes of coordination.
The authors would like to thank Owen Humpage, Geoffrey Wood, Forrest Capie, and Harold
James for their helpful comments.
The Hoover Institution Economics Working Paper Series allows authors to distribute research for
discussion and comment among other researchers. Working papers reflect the views of the
authors and not the views of the Hoover Institution.
2
1.Introduction
Eventssincethefinancialcrisisof2007-2008haveledtorenewedinterestin
monetarypolicycooperationandcoordination(Frankel2015).Whilethe
reintroductionoftheFederalReserve’sswaplineswithmajoradvancedcountry
centralbanksinSeptember2008andcoordinatedpolicyratecutsannouncedatthe
G20SummitinOctober2008attractedpraise,claimsof‘currencywars’bycentral
bankersfromemergingcountriesfollowingquantitativeeasingbytheFedandlater
bytheBankofJapanandtheECBhaveledtocallsformonetarypolicymakersto
takecoordinatedactiontoreducetheinternationalspilloverfromtheirdomestic
actions(Eichengreen2013b).Analternativeviewarguesthattheexternalitiesfrom
recentmonetarypolicyactionsreflectsthedeviationfromrulesbasedmonetary
policy(Taylor2013,Ahrend(2010),BordoandLandonLane(2012).Byarules
basedpolicyismeantthatthecentralbanksetsitspolicyinstrument(intheUSthe
federalfundsrate)inapredictablewayinreactiontoitsprimarypolicygoals:the
deviationofrealgrowthfrompotentialandthedeviationofinflationfromitstarget.
Inthisviewareturntorulesbasedmonetarypolicyandarollingbackofthe“global
greatdeviation”byeachcountry’scentralbankwouldleadtoabeneficialglobal
outcomewithouttheneedforpolicycoordination.
Thispaperreviewstheissueofmonetarypolicycooperationandcoordination
fromanhistoricalperspective.Weexaminetheexperiencesofcooperationand
coordinationsincethelatenineteenthcenturyamongadvancedcountriesacross
severalexchangerateregimes:theclassicalgoldstandard1880-1914;theInterwar
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goldexchangestandard1924to1936;theBrettonWoodssystem1944to1973;and
theManagedFloat1973tothepresent.Wedistinguishbetweencooperationand
coordination,althoughthedistinctioninrealityisprettymurky.Bycooperationwe
meanthesharingofinformationandtechniquesofcentralbanking,thediscussionof
commonproblemsandoccasional/adhocemergencylendingorotheroperations
betweencentralbanksinperiodsoffinancialcrisis.Bycoordinationwemeanpolicy
actionsformallyagreedandtakenbygroupsofpolicymakers(includingfinance
ministersandcentralbankers)aimedatachievingbeneficialoutcomesforthe
internationalsystemasawhole.Suchactionsmayconflictwithdomesticpolicy
goals.Toconserveonspace,welimitourselvestomonetarypolicyactions,including
somecasesoflenderoflastresort.Wealsoavoidthevastexampleofmonetary
policycooperationandcoordinationleadingtothecreationoftheEuropean
MonetaryUnionandweonlytangentiallydiscussthegrowingroleoftheemerging
countries,especiallyChina,intheinternationalmonetarysystem.
Inthispaperwearguethatinmonetaryregimeswhicharerulesbased(inthe
senseofthemodernliteratureonrulesversusdiscretion)cooperationwasmost
successfulandlesssoinregimesbasedondiscretionorpoorlygroundedrules.We
findlesssuccessformoreelaborateschemesofcoordination.
2.TheClassicalGoldStandard1880-1914
Theclassicalgoldstandardwastheoriginalrulesbasedmonetarypolicyregime
(BordoandKydland1995).Thebasicruleforeachmonetaryauthoritywasto
maintainconvertibilityofitspapercurrencyintermsofgoldattheofficialnominal
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price(orasafixednumberofouncesofgold).Thisrequiredsubsumingdomestic
policygoalstothedictatesofexternalbalance(exceptinthecaseofabanking
panic).Infact,monetaryauthoritieswithcredibilityhadsomelimitedflexibilityto
attendtodomesticstabilitygoalswithinthegoldpointswhichboundedtheofficial
parity(BordoandMacdonald2005).
Thegoldstandardwasaruleinthemodern(KydlandandPrescott1977)sense.
Adheringtotheconvertibilityrulewasacrediblecommitmentmechanismto
preventthemonetaryauthoritiesfromfollowingtimeinconsistentdiscretionary
policies.Thegoldstandardrulewasalsoacontingentrule.Convertibilitycouldbe
suspendedintheeventofwellunderstoodemergenciessuchasamajorwarora
financialcrisisnotofthedomesticauthority’sownmaking(BordoandKydland
1995).Insuchcircumstancesthemonetaryauthoritycouldissuefiatmoneyonthe
understandingthatitwouldberetiredoncethewarhadended.Intheeventofa
financialcrisisatemporarysuspensioncouldallowtheauthoritytoprovidelender
oflastresortliquidity.
Centralbanksinadvancedcountriesbefore1914didconsistentlyfollowthe
convertibilityrule.Theyalsoweresupposedtoadheretothe“rulesofthegame”–
rulesofthumbthattheywouldusetheirdiscountratestospeeduptheadjustment
toexternalimbalances.Inactualfactsomecountriesdidnotstrictlyfollowthese
”rulesofthegame“butengagedinsterilizationandgoldpolicy(policiestowiden
thegoldexportpoint)(Bordo1981).1
1AprominentexampleofwhichwasFrance.SeeBazot,BordoandMonnet(2016).AsdiscussedinBloomfield(1959)manyothercountriesalsoviolatedthe‘Rules”.
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Cooperationduringthegoldstandardwasquitelimited.Totheextentthatcentral
banksadheredtothegoldstandardtheyimplicitlycooperated.Eventheminor
violationsofthegoldpointsthatoccurredwereneversufficienttothreatenthe
internationalmonetarysystem.Thereisevidencethatinthefaceofseverallarge
financialcrises(e.g.1890and1907))theBanquedeFrance,whichhadverylarge
goldreserves,lentgoldoncommercialtermstotheBankofEngland,toallowitto
avoidsuspendingconvertibility.Somearguethatthatthiscooperationwasessential
tothesurvivalofthegoldstandard(BorioandToniolo2005,Eichengreen1992)but
theevidencesuggestsotherwise(Flandreau1997andBordoandSchwartz1999).
TheBankofEnglandhelda‘thinfilmofgold’becauseithadalongrecordof
credibilitywhichensuredthatcapitalflowswouldbestabilizing.Moreover,in
financialcriseswhichdidnotinvolverescueloanstheBankrequesteda‘Treasury
Letter’allowingittotemporarilysuspendconvertibility.Whenthishappened,asin
1825and1847,thepanicended.
Severalearlyunsuccessfulattemptsatinternationalmonetarycoordination
occurredatanumberofconferencesheldtotrytostandardizegoldcoinsacrossthe
majorcountries.InconferencesheldinParisin1867and1878Francetriedto
convinceGreatBritainandtheUStochangetheweightsoftheirstandardgold
sovereignandgoldeagleintothatofthefivefrancgoldcoin.Theideawasthat
havingsimilarcoinsacrossthegoldstandardwouldreducethetransactionscostsof
internationaltrade.Theadjustmentsinweightsforeachcurrencywereveryminor
buttheBritishandAmericanoppositiontosuchaninfringementontheirmonetary
sovereigntywasoverwhelming(Eichengreen2013a,James2016).Laterinthe
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century,attheheightoftheFreeSilvermovement,anumberofinternational
conferenceswereheldintheUStopromoteglobalbimetallism.Nothingcameoutof
them.
Thegoldstandardwassuccessfulbecauseitwasrulesbasedandeachmember
voluntarilyadheredtotheconvertibilityrule.Manyauthorshavearguedthatgold
standardadherencewasnotenoughtomaintainthegoldstandard(seeBordo
1984).TheyarguedthatitwasdurablebecauseitwasmanagedbyGreatBritain,the
leadingcommercialpower.Londonwasthecenteroftheglobalfinancialsystemand
ithousedtheleadingfinancialmarketsandcommoditymarketsandmany
internationalbankshadheadquartersthere,oratleastbranches.Thetraditional
viewisthattheBankofEnglandcoulddraw“moneyfromthemoon”byraisingits
discountrate.Moreover,itwasbackedbythesafeassetsoftheBritishEmpire
whosesovereigndebtwasguaranteedbytheBritishgovernment(Fergusonand
Schularick2012).OthersarguethatFranceandGermanywerealsokeyplayersin
thegoldstandardandthatimplicitcooperationbetweenthemguaranteedthesafety
ofthesystem(TullioandWalters1996).
Despiteitssuccessasarulesbasedsystem,thegoldstandardcollapsedbecause
WorldWarIcompletelyunraveledtheglobalfinancialsystemandvirtually
bankruptedalloftheEuropeanbelligerents.HadtheWarnothappeneditcould
havelastedlonger.
3.TheInterwarGoldExchangeStandard1924to1936
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AfterWorldWarI,GreatBritain,Franceandothercountriesexpressedastrong
desiretorestorethegoldstandard.TheUShadneverleftgold,itjustimposedan
embargoongoldexportsfortwoyearsafteritenteredthewarinApril1917.Allof
thebelligerentshadfinancedtheirwareffortswithacombinationoftaxes,debtand
seigniorage.Allhadlargedebtoverhangsandhighinflation.InGreatBritainthe
pricelevelmorethandoubled,theUSinflatedsomewhatless,inFranceittripled
andinGermanyitincreasedconsiderablymorethanthat.Thedebtoverhangand
highinflationmeantthatitwouldbedifficultformostcountriestogobacktothe
goldstandardattheprewarparitiesandmostexpertsbelievedthatitwouldtake
majorinternationalcooperationandcoordinationtorestoreit.Twoimportant
conferencesinBrussels1920andGenoa1922setthestagefortherestorationofthe
goldstandard.Becauseofapredictedgoldshortage(therealpriceofgoldhadbeen
vastlydeflatedbytheglobalwartimeinflation)itwastobeagoldexchange
standardunderwhichmemberswouldholdbothforeignexchangeandgoldas
internationalreserves.GreatBritainandtheUSweretobethecentercountriesof
thenewinternationalmonetarysystemandtheyweretoholdtheirinternational
reservesingoldvaluedattheprewarparities.
Extensiveinternationalcooperationwasrequiredtostabilizethecentral
Europeancountrieswhichhadrunhyperinflations.Thestabilizationpackageswere
imposedbytheLeagueofNationsandprivatesectorlenderssuchasJPMorganin
returnfortheloansrequiredtobuildupthereservesneededtorestore
convertibilityinvolvedmassivedisinflationandbudgetbalance.TofacilitateGreat
Britain’sreturntogoldin1925,theNewYorkFedestablisheda$200millionlineof
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creditfortheBankofEnglandinNewYork(Bordo,HumpageandSchwartz2015
chaptertwo).TheFedalsokeptitspolicylooserthanwouldotherwisehavebeen
thecase(FriedmanandSchwartz1963).
Theinterwargoldstandardwasbasedontheconvertibilityruleaswasitsprewar
ancestor,buttherulewasmorefragileandlesscredible.Onekeydifference
betweenthegoldexchangestandardandtheclassicalgoldstandardwasthatfew
countrieswereperceivedtobewillingtomaintainexternalbalanceattheexpense
ofdomesticpolicygoals.Becauseoftheextensionofthefranchiseinmostcountries,
thegrowthoforganizedlaborandthefreshresponsibilitiesofgovernmentsforthe
economicandsocialwelfareoftheirpopulationsaftertheterribleexperienceof
war,moreemphasiswasplacedondomesticoutput,employmentandprice
stability.Centralbanksbegantofocusmoreonstabilizingthebusinesscyclein
supportofexpansionaryeconomicpolicytargetsforemploymentandgrowth
(Polanyi1944;Eichengreen1992).Inaddition,manyofthepostWWIparitieswere
misaligned,reflectingmis-calculationofequilibriumexchangeratesandpolitical
pressures,togetherwithsomerecognitionthatiftheparitywerechangeditcould
bechangedagain,whichrecognitionmeantthatachangedparityreduced
credibility.(Eichengreen1992chapter6).Sterlingwaspeggedtogoldatan
overvalued(pre-war)parityinApril1925whileFrancewentbackin1926afteran
80%devaluation,atagreatlyundervaluedparity.Thismeantthattheadjustment
mechanismofthegoldstandardwasdestinedtomalfunction(Meltzer2003).The
BankofEnglandhadtocontinuallytightenmonetarypolicytoprotectitsgold
reservesinthefaceofpersistentbalanceofpaymentsdeficits,whichcontinually
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deflatedtheBritisheconomy(Keynes1925).Atthesametime,Franceranpersistent
balanceofpaymentssurpluses,whichshouldhaveledtoanexpansioninthemoney
supplyandinflationbutinsteadwerecontinuouslysterilized.Thismeantthat
Francewasabsorbingalargerandlargeramountoftheworld’sgoldreserves(Irwin
2013).TheUSkeptsterilizingitssurpluses,joiningFranceinsuckinggoldfromthe
restoftheworld.Inadditiontothemaldistributionofgold,thesystemwasfurther
weakenedbyfailingconfidenceinsterlingasareservecurrency.Declininggold
reservesattheBankofEnglandandFederalReservesterilizationpoliciesprompted
countriestoshifttheirforeignexchangereservesfromsterlingtodollars
(Eichengreenetal2016).
Againstthisbackgroundofflawedrules,considerablecentralbankcooperation
wasrequiredjusttopropupthesystem.Muchofthecooperationwaspersonal;
betweenMontaguNorman,GovernoroftheBankofEngland,BenjaminStrong,
GovernoroftheFederalReserveBankofNewYork,HjalmarSchacht,Presidentof
theReichsbankandEmileMoreau,PresidentoftheBanquedeFrance(Clarke
1967,Ahamed2009,James2016).NormanandStrongworkedtirelesslytogetthe
goldstandardworking.Onceunderway,theperennialproblemofsterling’s
weaknesscametothefore.ItwasaggravatedbytheBanquedeFrance’sprogold
policyofconvertingsterlingbillsintogold.InJuly1927Strongorganizeda
clandestinemeetingbetweenthefourgovernorsattheUnderSecretaryofthe
TreasuryOgdenMills’houseonLongIsland.Atthismeetingoneoftheclassic
monetarypolicyco-ordinationsofalltimewasworkedouttoprotectsterling.The
NewYorkFedagreedtocutitsdiscountrateandtoconductexpansionaryopen
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marketoperationswhiletheBanquedeFrance(andtheReichsbank)agreedtoshift
theirgoldpurchasesfromLondontoNewYork.Themeetingwasorganizedby
StrongandonlyonememberoftheFederalReserveBoardinWashingtonwas
present.Sterlingwassavedforanotherdaybutthefalloutfromthemeetinginthe
USkeptspreading.In1931atthepeakoftheGreatContraction,AdolphMiller,a
GovernoroftheFederalReserveBoard,blamedStrong’sactionsforfuelingtheWall
StreetboomwhichburstinOctober1929andforcreatingtheGreatContraction.
HiscriticismwaspickedupbyParkerWillisandCarterGlassandlaterbyHerbert
HooverinhisMemoirs(Meltzer2003).Theepisodeeventuallyledtoamajor
reformintheBankingActof1933whichstrippedtheNewYorkFed(andanyother
Reservebank)ofanyroleininternationalmonetarypolicyandgavefull
responsibilitytotheBoard.Moreover,Strong’sactionsbailingoutBritainontwo
occasionsmayhaveencouragedmoralhazardbydiscouragingtheBritishfrom
learningtoadjust(Meltzer2003).AfterStrong’sdeathin1928andSchacht’s
departurefromtheReichsbank,Normanpushedhardtoinstitutionalizemonetary
policycooperation,whichcametofruitionwiththecreationoftheBankfor
InternationalSettlement(BIS)inBaselin1930.
TheinitialoperationalpurposefortheBISwastomanageGermanreparations
aftertheYoungPlan,butitsmorefundamentalfunctionwastoprovideaforumto
promotecentralbankcooperationItwasalsosupposedtobeavenueforcentral
bankcooperationbysharinginformationandprovidingaconfidentialforumfor
centralbankerstomeetonaregularbasisaswellasprovidingservicesforcentral
banks(e.g.goldswaps,deposits,linesofcredit)(TonioloandClemet,2005,Borio
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andToniolo2005).Butitsearlyattemptsatcooperationwerenotsuccessful
(James,2016).TheBISwasinvolvedintwofailedattemptsinspring/summerof
1931torescuetheAustrianschillingandtheGermanmark.Itsresourcesweretoo
smallandtherescuesdidnothavethepoliticalbackingofFrance.
Thearchitectureoftheinterwargoldstandardemphasizedtheimportanceof
centralbanksfortheexerciseofmonetarypolicy.ThedelegatesattheGenoa
InternationalEconomicConferencein1922explicitlystatedthatcentralbank
cooperationwasavitalaspectofaprospectivenewgoldstandardandthatthis
shouldbeinstitutionalizedinaconventionor‘entente’(SchenkandStraumann
2016;James2016).MontaguNormanpromotedanetworkofcentralbanks
modeledontheBankofEnglandthatcouldcooperatetodeliver‘orthodox’policies
aimedatmonetaryandexchangeratestability.Hisvisionwassupportedbythe
FinancialCommitteeoftheLeagueofNations,whichsentmissionstoarangeof
centralEuropeanstatesinthemid-1920saspartofcreatingacoordinated
internationalmonetarysystem.SirOttoNiemeyerandothersfromtheBankof
Englandtouredemergingmarketstoadviseonmonetarypolicy,‘soundmoney’and
topromotetheestablishmentorreformofcentralbanks.Hisadvicewassometimes
controversial,forexample,inAustraliawherehisrecommendationsofausterityto
restoreexchangeratestabilityweregreetedwithindignation(Attard,1992;82).
ManyWesternHemispherestateslookedtotheUS;EdwinKemmereroftheFederal
ReserveBanktouredfrom1917-1931advisingontheorganizationofcentralbanks,
includingColombia,Chile,Ecuador,BoliviaandPeru(Singleton,2011;60).Withthe
increasedprominenceofcentralbanksandtheestablishmentoftheBankfor
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InternationalSettlements,theinterwargoldstandard(whileitselfafailureof
cooperationandcoordination)setthefoundationsforcentralbankcooperationfor
thenextcentury.
ThegoldexchangestandardcollapsedamidtheshocksoftheGreatDepression.
ManyarguethatadherencetothegoldstandardcausedtheGreatDepression
becauseof“goldenfetters”—becauseofthegoldconstraint,countriescouldnot
followlenderoflastresortpolicies(Temin1989,Eichengreen1992)andbecauseof
thecollapseoftheglobalmoneysupplygoldmultiplier(Bernanke1995).Others
arguedthattheDepressionwascausedbyinappropriateFederalReservemonetary
policy(FriedmanandSchwartz1963,Meltzer2003).ThecollapseintheUSmoney
supplywasthentransmittedtotherestoftheworldbythefixedexchangerategold
standard.
Twomajorattemptsatmonetarypolicycoordinationwereundertakeninthe
1930sasthegoldexchangestandardcollapsed,oneadisasterandonequite
successful.TheLeagueofNationssponsoredtheLondonMonetaryandEconomic
ConferenceinJune1933totrytostabilizeexchangeratesandachieveconcessions
ontraderestrictions.Theplanningforthesummitwasalreadyinplacewhenthe
U.S.abandoneditsgoldpeginApril1933,andthetimingmeantthattherewaslittle
prospectforasuccessfuloutcome.TheFrenchwereadamantforareturntogold,
butwouldnotagreetoreflatetheireconomytosupportthetargetsinBritainand
theUnitedStatesforrecoveryofprices,ortorelaxFrenchtraderestrictions
(Eichengreen1992).InthewakeofthisnowtraditionalFrenchunwillingnessto
cooperate,theBritishandAmericanadministrationsoptedfirmlytoprioritizetheir
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domesticgoalsforpricestability.TheUKturnedtomonetaryandtradecooperation
withthesterlingblocofcountriespeggedtothepound,thegoldbloccenteredon
FrancebolstereditsdefensesandtheUSembarkedonitsownindependentpath.
Threeyearslater,thetimingwasmorepropitiousforsuccessfulcooperation
undertheTripartiteAgreementof1936betweentheUS,UKandFranceasthe
Frenchpositionhadbecomeuntenablewhenthedollarandsterlingdepreciated
againstgold.Franceneededacoordinateddevaluationtopreventafreefallinthe
franc,andtheUSandUKalsohadaninterestinanorderlydepreciationofthefranc.
Withthiscoincidenceofinterest,itwaspossibletoagreetoacommonstrategynot
tomanipulateexchangeratesfornationaladvantage.Eachcountry’sExchange
StabilizationFundengagedindailycoordinatedexchangemarketinterventionto
produceanorderlydevaluationoftheFrenchfranc.Itendedattheoutbreakof
WWII(Bordo,HumpageandSchwartz2015chapter3.)
Monetarypolicycooperationandcoordinationcertainlycontributedtothe
interwargoldexchangestandard’sproblemsbyproppingupaflawedsystemand
possiblyevenhelpingfuelthe1920sassetpriceboom.Centralbankerswerelater
blamedfortheGreatDepressionandhadtheirpowersandindependencestripped,
withimportantconsequencesforthepostwarperiod.Unliketheprewargold
standard,althoughthegoldexchangestandardwasrulesbased,thecircumstances
andimplementationoftheruleswereflawedfromthebeginning.Centralbank
monetarypolicycooperationandcoordinationdidnotfunctionwellinthis
environment.
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4.TheBrettonWoodsInternationalMonetarySystem1944to1973
DuringtheSecondWorldWar,theGreatDepressionwascharacterizedasafailure
ofcoordinationininternationaltrade(protectionism)andalsointernational
monetarypolicy;USmonetarypolicymistakesspilledovertoEuropeaneconomies,
increasingthefragilityoftheglobalfinancialsystem.Thus,manyarguedthat
destabilizinginternationalshorttermcapitalflowsfueledcompetitivedevaluations
and‘currencywars’inthe1930sthatledtofurtherdisintegrationoftheglobal
economyviaprotectionisttradebarriersandcapitalcontrols(,Nurkse1944,
Kindleberger1986).Akeygoalofthepost-warperiodwasthereforetocreatea
frameworkforcooperationandcoordinationunderpinnedbycrediblerulesto
ensurealastingandprosperouspeace(Giovannini,1993).Formonetarypolicy,the
rulesweretomaintainpeggedexchangerateswithinnarrowbands(+/-1%)
supportedbycontrolsonshorttermcapitalflowsandaccesstoshorttermcredit
(fromtheInternationalMonetaryFund)tocovertemporarybalanceofpayments
imbalances.Unliketheinterwarsystem,membercountriescouldadjusttheir
paritiesintheeventofa‘fundamentaldisequilibrium’(whichwasneverdefined).
ThegoldconvertibilityrulewaspreservedthroughfixingthegoldpriceoftheUS
dollarat$35/oz.Goldparitiesforothercurrencieswereidentifiedthroughthe
dollar.Thecornerstoneoftheclassicalgoldstandard-convertibility–was
restrictedtocurrentaccounttransactionstopromotemultilateraltradeand
payments.Shorttermcapitalflowswereconsidereddisruptivetocooperationand
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coordinationandweresacrificedtoenhancedomesticmonetarypolicysovereignty
inthissolutiontotheMundell-Flemingtrilemma.
ThehistoryofthedesignoftheBrettonWoodssystemisremarkableforthe
strongconsensusthatareturntoapeggedexchangeraterule(andfreertrade)was
thebestwaytorecapturethebenefitsofthe19thcenturyeraofglobalizationunder
theGoldStandard.Thegeneralagreementontheappropriatenessandeffectiveness
oftheruleshouldhavebodedwellforthesuccessandcredibilityofthesystem,if
everyparticipantsharedroughlythesametoleranceforunemploymentand
inflation.Butalmostassoonasitstartedtooperateasdesigned,itbegantofounder,
requiringaseriesofrepairstokeepitafloat.
Intheimmediateaftermathofthewarothersystemsofcoordinationwere
formedtoallowmultilateraltradewithoutfullconvertibility:theEuropean
PaymentsUnion(EPU)andtheSterlingAreawerethetwomostprominent
examples.TheEPUprovidedmonthlyclearingforEuropeantradepaymentsfrom
1950-58withsettlementincreasinglyindollarsandgold.TheSterlingArea(UK,
Commonwealth–exceptCanada–colonies,severalmiddleeasternstates)operated
exchangecontrolsinconcertagainstthedollar,denominatedmostoftheirforeign
exchangereservesinsterlingandenjoyedfreerinternationalcapitalflowsfrom
1945-58(thereafterthecoordinationeroded)(Schenk2010).Theseinterim
solutionsallowedtradeliberalizationtofuelgrowth,andcurrentaccount
convertibilitywasfinallyintroducedbymostcountriesattheendof1958.
Buttheconvertibilityruleprovedinconsistentwithdomesticprioritiesoffull
employmentandgrowthonceinternationalcapitalmarketscouldnolongerbe
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contained.OffshoremarketsinLondonandcurrentaccountconvertibilityinthe
1960stestedthecredibilityofadherencetotheexchangeraterule,andtherewere
repeatedparityadjustmentsthatunderminedthesystemasawhole.Thepegged
raterulewasoperatedtooinflexibly,soinsteadofsmallandfrequentadjustments,
therewererepeatedspeculativerushesontheDM,Francandsterling,inparticular,
throughthe1960s.Bytheendofthe1960stheseattackshadspreadtothedollarat
theheartofthesystemandthegoldconvertibilityrulewaseffectivelyabandonedin
March1968.
TheBrettonWoodssystemisanexampleofanelaborateeffortat
institutionalizedcoordinationthatfailedbecauseoffundamentalflawsintherules
underpinningthesystem(Schenk,2016).Instead,asetofcooperativeinitiatives
weredeployedtopropthesystemuponanadhocbasisuntiltheconvertibilityand
exchangeraterulesfinallygavewayin1973.Thiscooperationamongleading
industrialeconomies(promotedinpartbyColdWarideology)allowedtheglobal
economytoreapthebenefitsoffreertradeandtechnologicalinnovationduringthe
first30yearsaftertheendoftheSecondWorldWarsothattheBrettonWoodsera
wascharacterizedbylowinflationandrapidgrowth(Bordo1993).
ThemostseriousvulnerabilityintheBrettonWoodsrulesarosefromtheuseof
thedollarasaninternationalreservecurrency,andthereforerelianceonUS
monetarypolicy.Theroleofthedollargraduallypolarizedthemainactorsinthe
systemandcrystalizedtheirdistinctivecompetinginterests,underminingeffortsat
coordinationanderodingcredibilityinthesystem’srules.AfterEuropeanstates
declaredcurrentaccountconvertibilityattheendof1958,RobertTriffin(1960)
17
warnedthatonceoutstandingdollarreservesheldbytherestoftheworld
surpassedtheUSmonetarygoldstockthatthiswouldincreasethepossibilityofa
runonthedollarandacollapseofthesystem.Thinkingintermsoftheinterwar
experience,TriffinworriedthatUSmonetaryauthoritieswouldtightenpolicy
leadingtoaworlddepression.Forhimthesolutionwasthecreationofan
alternativereserveassetsubjecttocoordinatedmanagement,likeKeynes’s(1943)
proposedbancor.CloselyrelatedtotheTriffinparadoxwasthecritiquethattheUS
gainedanexorbitantprivilegefromthedollar’spositioninthesystem.Sincethe
dollarwasaninternationalreservecurrency,theUSdidnothavetoadjustto
balanceofpaymentsdeficits,couldpromoteoutwarddirectinvestment(acquiring
foreignassets)andtheUSgovernmentcouldborrowatlowerratesthanotherwise
becauseoftheglobalappetitefordollardenominatedassets.TheFrenchin
particularresentedthisandperiodicallypressedfortheworldtoreturntothe
classicalgoldstandard(withdisruptiveeffects(Rueff1961).Recenteffortsto
measurethe‘privilege’accordedtotheUSAfindittobeverysmall(McCauley,
2015).Meanwhile,WestGermansviewedtheUSdeficitsasinflationary,whichran
countertoGermany’sstrongpreferenceforstablepricesandinhibitedthe
BundesbankfromadjustingtheDMorreducingpersistentGermanbalanceof
paymentssurpluses(Emminger1965).Nevertheless,thedollarpersistedatthecore
ofthesystembecauseofitsdesirablepropertiesasavehiclecurrencyandthe
unrivalledbreadthanddepthofUSfinancialmarkets.Atthetime,Depres,Salant
andKindleberger(1966)arguedthattheUSactedasafinancialintermediary
borrowingshorttermdepositsandlendinglongtermforeigninvestment.Inthis
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view,aslongastheFedfollowedcrediblemonetarypolicythedollarstandardcould
persist.
AstheBrettonWoodssystemcrumbledthroughthesecondhalfofthe1960s,
enormousenergywasputintoeffortstorenewtheframeworkforinternational
policycoordination,withlittletangibleoutcome.Anarmyofinternationalcivil
servantstouredtheworldonbehalfoftheG10industrialisedcountries,theOECD,
theIMF,theCommitteeof20andtheGroupof24developingcountriesseekingto
reformthesystemthroughschemessuchasreplacingtheUSdollarasprimary
reserveassetorbroadeningexchangeratebands(Solomon1982;Williamson,
1977).Theseeffortswereplaguedbyalackofconsensusabouttheproblemtobe
solved(toolittleinternationalliquidityortoomuch?)andtheproliferationof
intereststhatmadeacoherentfocusmoredifficulttoachieveasproblemsof
unequalgrowthanddevelopmentbecamemoreprominentduringthe1960s.US
TreasurySecretaryHenryFowler’scallforanewWorldMonetaryConferencein
July1965fellondeafearsastheprospectsforasuccessfulpublicmeetingweretoo
slimtoriskthesubsequentshocktoconfidence.fromafailure(Schenk2010,259).
Evenwhereareformwasachieved,inthecaseoftheSDRin1967/68,therewasno
fundamentalconsensusaboutitspurposeoroperationandithasremainedformost
ofitslifemainlyaunitofaccountratherthananeffectiveinternationalmonetary
instrument(Schenk2010).Prolongeddiscussionstomakeitmoreusefulthrougha
SubstitutionAccounttosupplementtheUSdollarduringthe1970sfailed(McCauley
andSchenk,2015).Meanwhile,thecredibilityoftheexchangeraterulesevaporated
19
withmultipleadjustments,currencycrisesandtheendofconsensuseitheronthe
diagnosisoftheproblemsintheinternationalmonetarysystemorthesolution.
TheGeneralArrangementstoBorrow(GAB)in1961createdalineofcreditat
theIMFsufficienttosatisfyaspeculativeattackonalargecountryliketheU.S.Its
lastingimportanceisperhapslessthroughitsdirecteffectandmorefromthe
creationofanewtierofleadershipintheglobalsystem.TheGroupof10countries
involvedintheGABbecameanalternativetotheIMFExecutiveBoardasleadersof
reformandasaforumforcooperation,challengingthebroaderconstituencyofthe
IMFandtheinterestsofemergingmarketeconomies.2TheG10asacoordinating
forumwasfurtherreinforcedsincetheG10centralbankgovernorsformedthe
governingboardoftheBankforInternationalSettlements.
InadditiontotheseambitiouseffortsatrenewedcoordinationthroughtheIMF,
wastheincreasedintensityofcentralbankcooperationthroughtheauspicesofthe
BankforInternationalSettlements.ThemonthlymeetingsofG10centralbank
governors,supportedbyatechnocraticsecretariatandasetoftopic-basedexpert
standingcommittees(Goodhart2011,TonioloandClement2005)providedan
opportunityfor‘soft’cooperationthroughasharingofideas,policiesand
instrumentsaswellasflexible,simpleandeffectiveresponsessuchascoordinated
linesofcreditandswaps.
Themeetingswereprivateandsecret,withnoformalminutesandthispromoted
afrankexchangeofviews.ThemonthlymeetingsofG10centralbankgovernorsand
2G10wereCanada,UK,USA,Italy,France,Belgium,Netherlands,Japan,Sweden,andWestGermany.SwitzerlandalsoparticipatedinmultilateralactivitiesthroughtheBIS.LuxembourgalsojoinedfortheBaselCommittee.
20
theirstaffsinBaseldidnotattractpoliticalattentionorrequireparliamentary
oversightinthewaythatIMFmeetingsandedictsdid.TheBIS,therefore,becamea
preferredvenueforcooperationforcountriessuchastheUK,whichstruggledto
maintainthesterlingexchangeratethroughthe1960suntilitfloatedinJune1972
(Schenk2010;Schenk2016).
Therewerethreemaincooperativeeffortsamongcentralbankstosupportthe
goldandexchangeraterulesoftheBrettonWoodssystem;theGoldPool,
multilateralGroupArrangementsandbilateralFedswaps.
TheGoldPoolbeganasanintergovernmentalinitiativefromtheUSTreasury
SecretaryinSeptember1961tokeepthemarketgoldpriceattheofficialprice.It
wasthrustupontheG10centralbankgovernorsinNovember1961;onlythe
Bundesbankwasanenthusiasticsupporterfromtheoutset(TonioloandClement,
2005pp.376-77).Eachcentralbankpledgedasetamountforgoldsalestothepool
andtheUSFedmatchedtheamountsoftheothermemberstoatotalof$270
million.Ontheotherside,theBankofEnglandintervenedtobuygoldwhenthis
wouldnotraisethegoldprice.Partoftheproceedsfromtheseoperations($30
million)waskepttofundsales,thussavingtheformalgoldpoolfortimeswhen
therewasasustainedupwardpressureonthegoldprice,whichstartedfrom1965.3
ThePooloperatedreasonablywelluntilafterthedevaluationofsterlingby14.3%in
November1967.Thispromptedafatallossofconfidenceinthegoldvalueofthe
dollarandthemarketrateofgoldwasfinallyallowedtoriseafteraruninMarch
1968,althoughcentralbanksandtheIMFagreedtocontinuetotradeattheofficial3Canada,JapanandSwedenjoinedin1964,creatingtheG10GoldandForeignExchangeCommittee,theprecursortothecurrentMarketsCommittee.
21
rateof$35/oz.Atthispoint,itbecameclearthattheresourcesofcentralbanks
couldnot‘buck’themarketforanylengthoftime.Fromthisdate,thegold
convertibilityruleoftheBrettonWoodssystemwasessentiallyoverandtheentire
system’sdayswerenumbered.
Asecond(andlesswellknown)supportwasthearrangementofcoordinated
linesofcreditamongtheG10centralbankgovernorsattheBISstartingin1960
(Schenk2010;TonioloandClement2005).AspikeintheLondongoldpriceto
$40.00inOctober1960onfearsthatJohnFKennedywouldfollowaninflationary
policyifelectedledtoaflurryofattemptsatcooperation(includinggoldswaps)
betweentheESFandarangeofEuropeancentralbanks,a$1billioncreditlineof
goldfromtheBISandfinallyrevaluationoftheDMandDutchguilderinMarch
1961.
Inthiscontextofdollarfragility,theBritishconvincedtheG10thatsupporting
sterlingwasavitalbulwarkforthecontinuationoftheBrettonWoodssystemand
therebygarneredmultilateralsupport.TheItalianlirareceivedsignificantsupport
butsterlingwasthemainbeneficiary,repeatedlyarrangingemergencyshortterm
linesofcredit:$904millionin1961,$250millioninMarch1963,$1billionin
September1964,$3billioninNovember1964.Toputthisinperspective,$3bin
1964isequivalentto$37.7billionin1997whichisonlyslightlylessthanthe$40b
rescuepackagearrangedforMexicoin1997bytheIMF,theWorldBank,BISand
bilateralswapscombined–andmuchmorethanthe$10bpledgedtoMexicobythe
G10centralbanksthroughtheBIS.Evenforthe1997KoreanCrisis,the13
contributorstothecoordinatedrescuepackageonlypledged$20billion.
22
From1965theBankofEnglandbegantonegotiatealongertermsolutiontothe
retirementofsterlingasareserveasset,culminatingintheFirstGroup
Arrangementin1966,forupto$1billioninsupporttobeactivatedbyaspecificfall
inglobalsterlingreserves(Schenk,2010).Aswiththeotherlinesofcredit,the
GroupArrangementwasnotfullydrawn,partlybecauseitsverypresenceimproved
confidence.Only$75millionoftheBIS’sownpledgewasusedandthefacilitywas
renewedwithoutmuchdiscussioninMarch1967.However,thecreditwas
completelyexhaustedbythetimeofthesterlingdevaluationofNovember1967,as
wellasafurtherlineofcreditof$250millionorganizedbytheBISasprincipal.But
thiswasnottheendoftheG10centralbankers’cooperationtosupportthedecline
ofsterling.
InthemidstofarunonthedollarandthecollapseoftheGoldPoolinMarch
1968,theBankofEnglandtriedunsuccessfullytogetanewpackageof$5billionin
credit.Insteadcentralbankspledged$1.175billion,almosthalffromextendingthe
Fed’sUKswapfacilityfrom$1.5billionto$2billion.Soonafter,theBISbeganto
planaSecondGroupArrangementtoretiresterling,supportedbya$2billionlineof
credit(equiv.$38btoday).Thistime,theUKwasforcedtonegotiatebilateral
agreementswitheachindividualcountrythatheldsubstantialsterlingreserves(34
inall)tolimitthediversificationoftheirreserves.4ThisSecondGroupArrangement
wasfinallyconcludedinSeptember1968,popularlyknownastheBaselAgreement.
Itwasrenewedseveraltimes(despitethedepreciationofthedollarin1971andthe
floatofsterlingin1972).
4In1968,23countriesheldoverhalfoftheirreservesinsterling.
23
AthirddefenseforthedollarwastheFederalReserve’sseriesofbilateralswap
linesbetweentheUSandmajorcurrenciesbegunin1962.Theswapswerecovered
short-termloanfacilitiesbetweentheFedandothercentralbanks,usuallyfor3
months,andservedtwopurposes.CountriesoutsidetheUSdrewdollarsto
interveneinforeignexchangemarketstosupporttheircurrencies(theBankof
Englanddrew$8.65bfrom1962-71.Ontheotherside,theFeddrewontheswapsto
supportthedollarpriceofgold.Theseswapsprovidedashort-termexchangevalue
guaranteeandtherebydiscouragedcentralbanksfromconvertingtheirunwanted
or‘excess’dollarstogold.TheFeddrew$11.6binforeigncurrenciesfrom1962-71
(Bordo,Humpage,Schwartz,2014).Theseswaplinesweresometimesretiredwith
foreignexchangeorRoosabonds(USTreasurysecuritiesdenominatedinforeign
currencies)(Bordo,HumpageandSchwartz2015ch.4).Theswapnetwork
expandedfromlessthanabilliondollarsin1962whenthefirstswapwasmade
withFrance,tocloseto$12billionbyAugust1971and$20bbyinmid-1974by
whichtimethenetworkincluded14centralbanks(includingtheBIS).
Thesetoolsandrescuepackagesallworkedintheshort-runtoheadoffthe‘crise
dujour’butthesystemwasnolongerconsistentwithUSdomesticpolicygoals.By
thespringof1971theFrenchandBritishthreatenedtoconverttheiroutstanding
dollarholdingsintogold(Garber1993,Bordo1993)andinAugust1971President
NixonclosedtheUSgoldwindowontheadviceofhisTreasurySecretaryConnolly.
TheBrettonWoodssystemdidnotcollapseintodeflationasTriffinprophesized;
rathertheproblemwasinflation.TheUSfollowedthekeygoldstandardruleof
keepinginflationlowuntil1965,butfromthenontheFedfollowedexpansionary
24
monetarypolicytohelpfinancetheVietnamWarandLBJ’sGreatSociety.Itthus
brokethebasicruleoftheBrettonWoodsSystemandtheEuropeansbecame
increasinglycriticalofUSinflation(Bordo1993).
Liketheinterwarsystem,BrettonWoodswasarulesbasedsystembuttherules
werebothanalyticallyflawedandincompatiblewiththepoliticaleconomy
environmentofthetime.Ineachcasetheexchangeraterulewasformallyset(and
inBrettonWoodstherewasanelaborateinstitutionalframeworktopromote
coordination)buttherewasnounderpinningdomesticpolicyruletosupportthe
system.Policymakersatthetimehadanincompleteunderstandingoftheroleand
effectofmonetarypolicyandtheyprioritizedthepursuitoffullemploymentover
pricestability(tovaryingdegrees).Totopthisoff,theUSascentercountrybroke
thekeyruleofthesystembyrunninganinflationarypolicy.ThattheBretton
Woodssystemlastedaslongasitdidwasdueinasignificantwaytoeffective
centralbankcooperationencouragedbyadeepfearoffloatingexchangeratesand
theimpactontheglobaleconomyofacollapseoftheexchangeraterules.This
cooperationtranscendedthecollapseofthesystemthatitwassupposedtodefend.
5.TheTransitiontoFloating1968to1973
Althoughmostcurrenciesabandonedtheirdollarpegsintheearly1970s(starting
withsterlinginJune1972followedbytheDMandYeninarushinFebruary-March
1973)therewasstillareluctancetoabandonthepeggedexchangeraterule(Schenk
andSingleton,2011).Mostdevelopingandemergingmarketsretainedsomeform
ofpegeithertothedollar,sterling,SDRoratrade-weightedbasket.Mostwestern
25
Europeancountriestookdeliberatestepstowardnarrowerexchangeratemargins
throughtheSnakeandplansforeconomicandmonetaryunion(Mourlon-Druol
2012).Duringthe1960s,thetradeintegrationoftheEuropeaneconomiesduring
thecreationofthecommonmarketincreasedthecostofexchangeratefluctuations
andledthemdownanexceptionalpathtomonetaryunion,whichweleavetoothers
todiscuss.Meanwhile,theUSeconomyhadmoretogainfromfloating(orsinking)
thedollarexchangeratewhileEuropeandJapanhadmoretolosethrough
uncontrolledappreciationoftheircurrencies.Theextraordinarytenacityofthe
appealofasystembasedonapeggedexchangeraterulewasclearlydemonstrated
intheill-fatedSmithsonianAgreementof1971.
InAugust1971PresidentNixonfinallyendedthecharadeofthegold
convertibilityrulebyclosingthegoldwindow,abruptlycallingtimeontheeffortsto
resolvepersistentimbalancesbythreateningatradewarandshiftingthe
responsibilityforadjustmenttosurpluscountries.WithintheUSTreasuryandFed
therewasincreasingsupportforjettisoningtheexchangeratepegaswell,butthe
interimgoalwasforgreaterflexibilityatanadjustedrate.TheNixonShockalso
belatedlywoketheG10andtherestoftheworldtotheimportanceofJapanasa
crucialplayerincoordination.Wherethefocusduringthe1960shadbeenmainly
onGermansurpluses,JapanwasthemaintargetofUSpressureforadjustmentin
thenegotiationsthatfollowed.TheSmithsonianAgreementre-builtthepegged
exchangeratesystematnewparitieswithwiderbands,butthecredibilityofthe
systemquicklyevaporatedinrepeatedrunsonthedollaruntilmostcountrieshad
abandonedtheirdollarpegsbythespringof1973.
26
Asinthe1930s,thesystemwaspulledapartbypersistentimbalances,partly
causedbytwooilpriceshocksin1973/4and1979.Theendoftheeraofrapid
growthwithrelativelylowinflationpromptedalossofconfidenceamongpolicy-
makersandtheymostlyabandonedeffortsatcooperationandcoordinationinan
attempttoshoreuptheirdomesticeconomies.Theseeminglyendlesscircusof
panelsandmeetingstoreformtheinternationalmonetarysystemcontinued
throughoutthe1970sinParis,London,WashingtonandBonnbuttherewaslittle
consensusonhowtoachievestablemonetarypolicyandnorulestounderpin
effortsatmonetarycooperationandcoordination.
Instead,thefocusturnedtohowtocorrectpersistentglobalimbalancesthrough
rulestoforcecountriesinsurplustoadjusttheirexchangerates(adirectreversalof
theburdenofadjustmentundertheBrettonWoodssystem).Investigationshad
begunduringtheBrettonWoodseraintheUSTreasuryasawaytoredresstheUS
deficitaswellastointroducegreaterexchangerateflexibilityintothesystem,
drawingonideasfromRichardCooper(1970)andothers(Schenk,2016).Theso-
calledPlanXemergedfromaspecialpolicygroupledbyPaulVolckerfrom1969.
By1972(beforesterlingfloated)theproposalwasforasetofindicatorsincluding
thesizeofreservestopromptmultilateralpressureonacountrytoadjustits
exchangerate.AlthoughnotinitiallygatheringsupportfromEuropeanstatessuch
asFrance,whichwereaversetofloatingexchangerates,theconceptretainedits
attractionsandversionsre-emergedinthemid-1980sandagaininthe2000sasa
waytodiscouragetheaccumulationofglobalimbalances.
27
Thekeylessonfromthisperiodwasthedifficultyofrevivinganinternationalrules
basedsystemwhendomesticpolicyprioritiesdiverged.
6.ManagedFloating1973tothepresent
6.11973to1980
Theinternationalmonetarysystemswitchedtoamanagedfloatingregimein1973.
MiltonFriedman(1953)arguedthatfloatingrateshadtheadvantagesofinsulating
thedomesticeconomyfromexternalmonetaryshocksandthattheygavemonetary
authoritiestheindependenceofconductingmonetarypolicytosatisfydomestic
goalswithoutimposingcapitalcontrols.AccordingtoFriedman,independencefrom
theconstraintofpeggedexchangeratesrequiredmonetaryauthoritiestofollow
stablerulesbasedmonetarypolicies.HispreferredrulewasfortheFedtofollowa
constantmoneygrowthrateequaltothegrowthrateofrealGDPadjustedforthe
trendgrowthrateofvelocity.Otherwisemonetaryinstability,inadditionto
producinginstabilityinpricesandrealincome,wouldalsoleadtoinstabilityinthe
nominalexchangerate.
IttookclosetotwodecadesfortheFederalReserveandothercentralbanks(with
theprincipalexceptionsoftheBundesbankandtheSwissNationalbank)tolearn
thislesson.The1970swasadecadeofmonetaryinstabilitymanifestinhighand
variableinflation.Thiswasreflectedinexchangeratevolatility.Thereisan
extensiveliteratureontheGreatInflation(BordoandOrphanides2013).Many
attributeittoflawedmonetarypolicybycentralbankstryingtomanipulatethe
PhillipsCurvetrade-offtoachievefullemployment.Othersattributedittothe
28
accommodationofsupplyshocks(BlinderandRudd2013).Inflationbegantorisein
themid-1960sand,asmentionedabove,contributedgreatlytothecollapseofthe
BrettonWoodsSystem.
Monetaryauthoritiesengagedinextensiveinterventiontostemtheperceived
volatilityofexchangerates.TheFedandothercentralbanksbelievedthatforeign
exchangemarketswereinherentlyunstableandthatexchangemarketintervention
wasrequiredtokeepexchangeratesclosetotheirfundamentalsandtoreduce
unexplainedvolatility(Bordo,HumpageandSchwartz2015chapterfive).Itwasnot
untilthenextdecadethattheFedandothercentralbankslearnedthatstable
domesticmonetarypolicygearedtolowinflationwouldreduceinstabilityin
nominalexchangerates.
TwoofthepropsdesignedfortheBrettonWoodssystemwereretainedthrough
the1970s.Eventhoughsterlingwasmeanttobefloating,theG10centralbanks
werereluctantlyconvincedtolaunchaThirdGroupArrangementinFebruary1977
of$3billion(equiv.to$28.7btoday)tofinallykilloffsterling’sresidualreserverole
(Schenk,2010).ThistimethecoordinatedsupportwascontingentontheIMF
conditionalityfromthe1976stand-by;theG10hadshiftedtheirmonitoring
responsibilitiestotheIMF.Theprolongedsupportfortheorderlyretirementof
sterlingfrom1960-1978wasanimportantexampleofcoordinationamongcentral
bankstotrytoavoidacrisisintheglobalmonetarysystemandmanageanorderly
transition.
TheFed’scentralbankswapsystemalsocontinued,althoughtheexchangerate
coverofferedtoforeigncentralbankswasremovedandasaconsequencenoG10
29
foreigncentralbankdrewontheswapsfrom1973-1980.TheFed,however,
increasinglydrewontheswapsystemtosupporttheirinterventiontostabilizethe
dollar.By1978totalfacilitiestotaled$29.4b,althoughatitshighestpoint(in1978)
outstandingFedswapobligationsamountedtoonly$5.5b.Thepublicizedceilings
hadalargelyrepresentationalpurposetodemonstratethecommitmentofthe
partners(Bordo,HumpageandSchwartz2014).
Againstthebackgroundofrisinginflationandwiththedollardepreciating
againsttheDMandyenandothercurrencies,theFederalReserveengagedin
frequentandmassivesterilizedexchangemarketintervention.Manyofthesalesof
DMandYenwerefinancedbyborrowingviaswaplineswiththeBundesbankand
othercentralbanksuntil1980.SomeoftheFedinterventionswerecoordinated
withsimilaroperationsbytheBankofJapan,Bundesbankandothercentralbanks.
AfterDecember1975theFedcooperatedcloselywithothercentralbanks,keeping
theminformeddailyoftheiractions,althoughalloftheoperationsinthisperiod
werecovert.Empiricalevidencesuggeststhatmuchoftheinterventionhadvery
smallandpossiblyverytemporaryeffectsinreversingexchangeratemovements.
Bordo,HumpageandSchwartz2015(p.236)concludedthatforthe1974to1977
period“only49percentoftheactiveinterventionstosupportthedollarandonly64
percentofthepassiveinterventionstoacquireGermanmarksappearsuccessful.”
Thesituationworsenedinthenextthreeyears.In1978thedollarwentintoafree
fallreflectingtheFed’slackofsuccessinarrestinginflation.OnNovember11978,
theCarteradministration(alongwiththeFed)announcedamassivedollardefense
packageconsistingofa1percentagepointincreaseinthediscountrateto9½per
30
cent,a$30bincreaseinforeignresourcesandclosercooperationwithGermany,
JapanandSwitzerland.Theforeigncurrencypackageincludeda$47.6bincreasein
theFed’sswaplineswiththesecountries.TheTreasuryalsowouldissueupto$10
billioninGermanmarkandSwissfrancdenominatedsecurities,calledCarterbonds
(Bordo,HumpageandSchwartz2015page243).Massivecoordinatedexchange
marketinterventionswiththeBundesbankandothercentralbanksfollowedinthe
nexttwomonths.Inreactiontotheseactionsthedollarbeganappreciatingagainst
themark.
ButtheevidencefortheperiodSeptember1977toOctober51979suggeststhat
‘”despitethechangesinamounts,frequency,objectivesandopenness,US
operationswerenomoreeffectivethantheearlieroperations.Asinthepre-1977
period,theydemonstratedsometendencytomoderateexchangeratemovements”
(Bordo,HumpageandSchwartz2015page247).
Inreactiontothevolatilityinthedollarandthepublic’sreactiontorising
inflationandinflationexpectations,PresidentCarterappointedPaulVolckeras
ChairmanoftheFederalReserveBoardinOctober1979withthemandatetoend
theinflation.TheVolckershockofOctober51979whentheFedshiftedtoatight
monetaristtypemonetary(non-borrowedreserves)targetingstrategy,raisedthe
discountrate,imposedreserverequirementsandallowedinterestratestorise
dramatically,eventuallybrokethebackofinflationandinflationaryexpectations
andreversedthedeclineofthedollar.Similarpolicieswerefollowedinother
countries.
31
The1970swasalowpointfortheIMFastheofficialhubofinternational
monetarycoordination.Itwasonlyin1976thattheIMFfinallyrecognisedthe
legitimacyofflexibleorfloatingexchangeratesandfromthistimetheIMF,seeking
aroletoreplacetheoneithadlost,turnedmoreresolutelytofocusontheinterests
ofdevelopingeconomiesratherthangovernanceoftheinternationalmonetary
system.Thiseffortalsobroughtmixedsuccessasthegapbetweenrichandpoor
countrieswidenedandmanyeconomiesaccumulatedunsustainableamountsof
debt,whicheruptedinthe1982sovereigndebtcrisis.
Instead,themid-1970sgaverisetothe‘G’-summits,startingwiththeG6at
Rambouilletin1975,addingCanadain1976andthenRussiain1998toformtheG8.
Thesewereannualmeetingsofpoliticalleaderssupportedbyfinanceministers’
meetingsandmeetingsofcentralbankers.Forcentralbanks,ofcourse,thesummits
supplementedtheregularmonthlymeetingsamongG10centralbankgovernorsat
Basel.Thesummitsgenerallyresultedinrathermundaneandrepetitivepublic
statementscommittingtheparticipantstoensuringstablemarkets,buttheyalso
providedanopportunityforsharingofideasandapproachestoglobaleconomic
challengesinformally.The1975G7Summitpledgedmembersto‘closer
internationalcooperationandconstructivedialogueamongallcountries’tocombat
inflationandunemploymentandthat‘ourmonetaryauthoritieswillacttocounter
disorderlymarketconditions,orerraticfluctuations,inexchangerates’.Very
similarlanguageisusedinthejointdeclarationseversince,usuallywithreference
toworkinginconjunctionwiththeIMF.AmoreambitiousinitiativeattheBonn
Summitof1978saweachgovernmentexplicitlycommittedtospecificgoalsof
32
growth,lowinflationand/orfiscalpolicy‘tobringaboutabetterpatternofworld
paymentsbalancesandleadtogreaterstabilityininternationalexchangemarkets’;
dubbed”thelocomotive”.Buttheseeffortswerederailedbythesecondoilcrisisso
thatthenextsummitatTokyoin1979focusedinsteadontargetstocutoilimports
andconsumption.
Monetarycooperationviacoordinatedexchangemarketintervention(EMI)and
otherstrategiesdidnotworkinthisperiod.Thiswasbecausemostcentralbanks
didnotfollowarulesbasedpolicyofkeepingdomesticinflationlow,consistentwith
beingonafloatingexchangerate.
6.2The1980s
The1980ssawareturntoaconsensusinmonetarytheoryandpolicy.Paul
Volcker’ssuccessinstemminginflationintheUSwasapplaudedbycentralbankers
andgovernmentsacrossthedevelopedworld.Anexaminationoftheminutesofthe
monthlymeetingsoftheG10centralbankgovernorsshowsthatinthe1970sthey
sharedtheircommonfrustrationswiththeirgovernments’inabilitytobeconsistent
intheirpolicyguidanceandtheensuinglackofcredibilityofmonetarypolicy.They
wriggledundertheirlackofindependencewhenorderscamefromministriesto
reversetightmoneytopromotegrowthtargetsattheexpenseofhigherinflation.
ThroughtheseregularmeetingsattheBIStheG10centralbankgovernorscreated
anepistemiccommunitywithsharedgoalsforinflationbutalsoageneral
commitmenttoavoiddestabilisingshorttermexchangeratechanges.Asthe
operationalarmforcoordination,thisforumwasimportantforsharinginformation,
33
debateandformingopinioneventhoughtheylackedpolicyindependence.This
observationgoesbeyondEichengreen’s(2013a)identificationoftheBasel
CommitteeonBankingSupervisionasanepistemiccommunity,toincludethe
formativedevelopmentofcommonapproachestomonetarypolicy.
Volcker’spolicyshiftwasapparentlytakenwithalmostnoexternalconsultation
(therewasadvancenoticefortheBundesbank)soitcannotbeclassifiedasan
exampleofcooperationorcoordination.Instead,itsetthestageforanewdomestic
basedruleformonetarypolicy.Duringthe1970scentralbankershadcomplainedto
eachotherattheirmonthlymeetingsinBaselaboutinconsistentministersand
treasuryofficials,theconflictbetweeninflationandemploymenttargetsandthe
lackofcredibilityoftheirmonetarypolicyinthispoliticalenvironment.Volcker’s
‘unconventional’monetarypolicyin1979wasthereforeapplaudedatthe
subsequentBISGovernors’meetingandVolcker’scolleaguesaskedwhattheycould
dotohelpmakethepolicyeffective.Theirenthusiasmwastemperedbyinterest
rateinstabilityandperceivedspillovereffectsthrough1980and1981,butthey
continuedtoaccommodateUSmonetarypolicyandthecommunicationatthe
monthlyBaselmeetingsnodoubtenhancedthatprocessofcooperationthroughthe
sharingofinformation.Atthesametime,thesystemofswapsandcoordinated
shortterminterventiontosmoothforeignexchangemarketvolatilitythathadbeen
developedinthe1960swascontinued.
Theabilitytofollowamonetaryrulewasdramaticallyreinforcedbyinnovations
insmallercountries.NewZealand’sexperimentwithcentralbankindependence
andtransparentinflationtargetingsetthemodelforthetransformationofthe
34
credibilityofmonetaryrules,justaseconomictheoryandunderstandingof
monetarypolicywasenhancedbytheidentificationoftheTaylorRule.Bytheend
ofthe1980s,therefore,wehadreturnedtoarulebasedsystemfoundedon
domesticmonetarypolicyactionsbyindependentcentralbanksactingintheirown
countries’interests,whichseemedtogeneratealastingperiodofmoderate
inflation.Butthelingeringambitionsformoreelaboratecoordinationhadmuch
lesssuccess.
Whilecentralbankersmovedclosertoacommonunderstandingonmonetary
policy,governmentsandTreasurybureaucratscontinuedtoseekexchangerate
stabilityoratleastthe‘orderlyexchangemarkets’describedastheagreedgoalin
therevisedIMFstatutes.Exchangeratevolatilitycontinuedascentralbanks
learnedtoadoptandoperatethenewsetofdomesticmonetaryrules,andthe1980s
witnessedaseriesofgrandgesturesummitrytocoordinateexchangerateandfiscal
policythatproducedmixedresults.
TheVolckershockandthreeyearsoftightmonetarypolicyledtoadeclinein
inflationfromapeakof15%in1979to3%bythemid-1980s.Thisledtoamarked
appreciationinthedollartoadvancedcountries—by55%onatradeweighted
basis.By1985Germanyandothercountrieswerecomplainingaboutthe
imbalancesandtheBundesbankhadbeeninterveningtooffsetthedepreciating
mark.Moreimportant,thestrongdollarwasharmingtheexportsofUS
manufacturedgoodsandthisledtothreatsintheCongresstoraisetariffs.The
incomingSecretaryoftheTreasuryJamesBakerwasamuchbiggerfanof
macroeconomicpolicycoordinationandofEMIthanhispredecessorDonaldRegan
35
(underwhosewatchtherewasonlylimitedEMI).SoattheG7FinanceMinisters
SummitmeetingatthePlazahotelinNewYorkCityonSeptember221985
ministersagreedthatcoordinatedEMIwouldbeusedtodepreciatethedollar.They
alsoagreedthattheUSwouldfollowexpansionarymonetarypolicyandJapan
woulddotheopposite.Immediatelyupontheannouncementthedollardeclined.
However,ithadbeenfallingsinceFebruary1985andtheincreasebeforethe
meetingwasonlyatemporaryblip.MassivecoordinatedinterventionbytheFed,
BundesbankandBankofJapanlastedtwoweeksbuttheevidencethatitwas
successfulislimitedFeldstein(1986);Humpage(1988)arguedthatmonetarypolicy
hadturnedlooserwellbeforethePlazaandthatthismorelikelyexplainedthe
turnaroundinthedollar.Bordo,HumpageandSchwartz2015(page304)foundthat
theEMIdidnothavemucheffectontheexchangerate.Ontheotherhand,
DominguezandFrankel(1993)foundthatcoordinatedEMIdidhavesignificant
effectsandFrankel(2016)arguedthatthePlazawasasuccess.Howeverthepart
oftheagreementthaturgedJapantofollowtightermonetarypolicythanconsistent
withmacrofundamentalsledtheBankofJapantokeeprateshigherthanwouldbe
thecasehaditfollowedaTaylorrulein1986(IMF2011,Taylor2016).
Thedollardeclinedthrough1986leadingtoconcernsthatithadfallentoofar.
MembersattheG7meetingattheLouvreFebruary221987agreedtocoordinate
policiestostabilizethedollar.ThismeantcoordinatedEMIintheoppositedirection
thanatthePlaza,andthatJapanwouldfollowmoreexpansionarymonetaryand
fiscalpolicywhiletheUSandGermanyandtheotherswouldkeeptheirmacro
policiesconstant.AswiththePlazaAgreement,thereisstrongevidencethattheEMI
36
hadlittleeffect(Bordo,HumpageandSchwartz2015)buttherewerelongerlasting
effectsontheJapaneseeconomythatweredevastating.AftertheLouvreAccord
policyratesdeviatedinanegativewayfromarulesbasedpolicyandmanyargue
thatthisexpansionarymonetarypolicytriggeredtheassetpriceboombustleading
toaseriousbankingcrisis,andoveradecadeofstagnation.
6.3TheGreatModeration1985to2006
Bythelate1980smostadvancedcountrieshadlowinflation,hadadoptedcentral
bankindependence,andwerefollowingrulesbasedmonetarypolicyThisledtoa
20-yearperiodofstableandlowinflation,andstableandrapidrealgrowth.Mostof
thedisturbancesintheglobaleconomyaroseinemergingeconomiesratherthan
industrialisedcountriesatthecoreoftheglobaltradeandfinancialsystem.
Beginninginthelate1980stheFederalReservebegantoturnawayfromtheuse
ofexchangemarketinterventionasasignificantpolicytool.Anextensivedebateat
theFOMCandintheacademyarguedthatsterilizedEMIandcrediblemonetary
policywereconflictinggoals.By1995ChairmanGreenspanagreedandtheUSonly
undertooksuchactionsonthreeoccasionssince.Alsointhisperiodeconomists
argued,basedongametheoryandmulticountryeconometricmodels,thatcentral
banksthatpursuedcrediblerulesbasedmonetarypolicyminimizedthespillovers
thatwerebelievedtohavenecessitatedcoordinatedpolicies(Taylor1985).Asit
turnedout,inthisperiodtherewerefeweroccasionswhentherewasacallfor
monetarypolicycoordinationotherthanthemundanestatementsatG7summits.
37
Instead,themainfocusofcooperation/coordinationreturnedtothelenderoflast
resortroleofthe1960sand1970s.
6.4ReturntoLenderofLastResort
Whileindustrialcountriesmainlyadoptedfloatingormanagedfloatingexchange
rates,manyemergingmarketeconomieswithunderdevelopedfinancialsystems,
andthinandshallowdomesticforeignexchangemarketsoptedforadjustable
peggedexchangerates.Throughthemid-1980smanyoftheseeconomiesgrew
quicklythroughexportorientedindustrialization,particularlyinEastAsia.They
wereencouragedbytheIMFandWorldBanktoliberalizetheircapitalmarketsbut
theirinstitutionswerenotstrongandthiscontributedtoarashoffinancialand
currencycrisesinthe1990sasthedollarappreciated.5Theseepisodeswere
viewedasposingsystemicthreatsviacontagiontotheadvancedcountriesand
promptedcallsforinternationalcooperation,withcentralbanksservingaslenders
oflastresorttosupplementtheresourcesoftheIMF.Thepatternofsupport
packagesechoedseveralaspectsoftheBaselAgreementsofthe1960sand1970s;
thereluctanceofdebtorsincrisistosubmittotheIMFasafirstlineofdefense,the
insistenceofcreditorsonanIMFsealofapprovalbeforeofferingcoordinated
bilateralsupport,thepreferenceofcentralbanksandgovernmentstoprovideonly
contingentlinesofcreditthattheyhopedwouldnotbedrawn.Buttheydiffered
significantlybecausetheoperationswerebail-outsratherthanrescues(inthe
5Inthe1990smanyemergingmarketcountrieswereadvisedtoadoptfirmpegsorcurrencyboardstoimportcrediblenon-inflationarymonetarypolicies.
38
lenderoflastresortsense)(BordoandSchwartz,1999,2000)andthisheightened
themoralhazard.
Ineachcase(Mexico,Thailand,Indonesia,SouthKorea,Brazil,Argentina,Russia)
thecrisisarosefromovervaluedcurrenciespeggedtotheUSdollar,whichwere
toppledbyasuddenreversalofcapitalflowsthatprompteduncontrolled
devaluationandafinancialcrisis.Weakfinancialsectors,heavyforeigncurrency
denominatedborrowing,governmentguaranteesandexuberantinvestors
contributedtothefragilityofthesystem(BordoandMeissner2016).Ineachcase
thedebtorcountryinitiallysoughttoby-passtheconditionalityoftheIMFand
activateswapsorbilateralsupport(Boughton,2010).But,inlinewiththefinal
coordinatedsupportofferedbytheG10totheUKinthe1970s,creditorcountries
insistedonanIMF‘sealofapproval’throughacontingent(smaller)stand-by
agreementwithaletterofintent.TheIMFinsistedondevaluation,restructuring
financialmarketsandfiscalretrenchment,withmixedsuccess.Internationalpolicy
coordinationwasthusoperatedthroughtheIMFExecutiveBoardandthencentral
banksandfinanceministerssupplementedthiscredit,ofteninlargeramounts.The
differencefromthe1960sand1970swasthatthefundswereusedtobailout
creditorsratherthanasaresourceforcentralbankstogainabreathingspace.The
coordinatedoperationsthereforecreatedmoralhazardthatwasonlypartiallyoffset
bytheIMF-inducedrestructuringprograms(moresuccessfulinsomecountriesthan
others).
Wejudgethatthecoordinatedresponsetotheemergingmarketfinancialcrises
wasnotafullsuccess.Althoughthecriseswereeventuallystemmedandgrowth
39
returnedundermoreflexibleexchangerates,theyleftalegacyofinstitutional
problemsthatexposedtheweaknessesoftheseregimesadecadelater.Thebail-
outsdidnotremovetheincentiveofcountriestoaccumulatesubstantial
precautionaryreservesthroughpersistentsurpluses.Thefragilityoftheglobal
systemwasincreasedbymanycountriesaimingtorunpersistentbalanceof
paymentssurplusesduringthe2000sasinsuranceagainstafuturesuddenstopand
toavoidthenecessityofsubmittingagaintothedisciplinesofafuturerescue
package.
Whilethecurrencycrisesofthe1990spushedmostemergingmarketeconomies
togreaterflexibilityby2000,thePeople’sRepublicofChinabecameanincreasingly
importantnon-conformist.TheRMBexchangeratewasnotdevaluedinthewakeof
depreciationselsewhereinAsiaandthishelpedtosupportexportrecoveryinthe
regionasChineseeconomicgrowthacceleratedintherun-uptoWTOaccessionin
2001.FromclaimsthattheRMBwasovervaluedintheearly1990s,criticssoon
pointedtoChina’shugesurplusesasproofthattheRMBwasundervalued.Capital
controlsandconsistentlyhighgrowthallowedChinatoresistcallstoappreciateits
currency,buttheincreasinglylargeandpersistentcurrentaccountsurpluses,most
ofwhichwasunsterilized,cameatsomecosttopricestability,particularlyin
volatilerealestateandotherassetmarkets.Atthesametime,China’sroleinthe
governanceoftheglobalmonetarysystembecamemoreandmoredistantfrom
China’simportanceintheglobaleconomy.In2005theRMBwasappreciated
slightlyandamoreflexibleregimewasadoptedtoallowanorderlyappreciation,
althoughtheresultswereatfirstsomewhatdisappointing.Chinahashada
40
challenginghistorywiththeIMF,mainlyfocusedaroundthehistoricallysmallquota
(andthereforesmallvotingrights),theiriconoclasticinternationalmonetarypolicy
andcontinuedexchangecontrols(Schenk2015).
Aftertheglobalfinancialcrisisfocusedevenmoreattentiononthesystemicrisks
ofpersistentimbalances,Chinaandotherlargeemergingeconomieswerebrought
morecloselyintonetworksofcooperationandcoordinationthroughtheG20from
2009,includingtheRMBintheSDRin2015andtheeventualratificationofthe
2010IMFquotaenlargementattheendof2015.Butchallengespersistbecauseof
thenatureoftheChinesepoliticalregimeandthechallengesofslowinggrowth.
Withoutashifttoopencapitalmarketsandliberalizationofthefinancialsystem
(whichseemsalongwayoff)Chinaremainsathreattoglobalstability.
Thusthecoordinatedrescuesduringtheemergingmarketcrisesofthe1990s
werequitefarremovedfromrulesbasedpolicy.Firsttherescueswerebailoutsto
countriesfacinginsolvencyandnottocountriesfacingatemporaryliquidity
shortfall,henceviolatingakeyBagehotianprincipleandengenderingmoralhazard
forfuturecrises.Second,thesecountriesdidnotfollowrulelikedomesticmonetary
policiesbecausetheyhadnotdevelopedsufficientlyinthesenseoffollowingthe
ruleoflawandhavingdeepandliquidfinancialmarketsetc.Someofthesecountries
inrecentyearshaveadoptedrulelikepoliciese.g.MexicoandSouthKorea,butnot
alle.g.China.
6.52007tothepresent.
41
TheGreatModerationendedwiththesubprimecrisisof2007-2008.Thereisa
voluminousliteratureonthecausesofthecrisis.Themainonesare:departures
fromrulesbasedpolicyfueledthehousingboombust;globalimbalances;lax
supervisionandregulationofthefinancialsectorthatledtothedevelopmentof
mortgagebackedsecurities(MBSs)andotherderivativescombinedwithexcessive
leverage(BaileyandTaylor2013).
Theresponsetothecrisisin2007wasforthecentralbanksindividuallytofollow
veryexpansionarymonetarypolicies.Byearly2008theywereworriedabouta
commodityinducedinflationandsotheystoppedexpansionarypolicy.Theevents
ofthesummerof2008,leadingtothecollapseofLehmanBrothers,createdafull
scaleglobalfinancialpanicreminiscentofthesummerof1931.Thisledtomassive
unprecedentedlenderoflastresortactions(althoughmanydidnotfollowclassical
Bagehot’srules,Bordo2014)bytheFed,theBankofEnglandandothercentral
banks.ItalsoledtoareactivationoftheswaplinesbytheFederalReservein
September2008toprovidedollarliquiditytotheECBandotherforeigncentral
bankswhofaceddealingwiththeliquidationofthedollardenominatedMBSsand
othertoxicderivativesheldbytheirbanks.Thiscooperativepolicymayhave
avertedaglobalpanic.Indeed,somethingsimilarmighthaveavertedthe
internationalaspectofthemeltdownof1931.
Inadditiontotheswaps,attheSummitinWashingtonDCinNovember2008,
leadersoftheG20committedthemselves‘tostabilizefinancialmarketsandsupport
economicgrowth’,withparticularemphasison‘theimportanceofmonetary
support’aswellasfiscalexpansion.Theyalsocommittedthemselvesanewto
42
reformingthearchitectureoftheinternationalfinancialsystemandthegoverning
boardoftheBISwasextendedtoallownineothercentralbankstobemembers.
Bytheendof2008,thefinancialcrisishadendedbuttherealeconomywasstill
contractingandthefederalfundsrateandothercentralbank’spolicyrateshadhit
orwereclosetothezerolowerbound.TheFedannounceditspolicyofquantitative
easing(QEI)inDecember2008—theunconventionalpolicyoflargescaleopen
marketpurchasesoflongtermTreasurysecuritiesandAgencymortgagebacked
securities.InadditiontothepurchasestheFedbeganforwardguidancetoguide
financialmarketsexpectations.TheBankofEnglandsimilarlyengagedin
quantitativeeasingfromMarch2009andforwardguidancefromAugust2013,
relatedtoatargetunemploymentrateof7%.TheECBfollowedinMay2009.Japan
hadalongerhistoryofQEfromMarch2001-2006andreneweditspolicyinOctober
2010.TheseinitiativesweresuccessfulinarrestingtheGreatRecessionbyJune
2009intheUS,buttherecoverythatfollowedhasbeenanemic.Further,the
spillovereffectshavebeencontroversial.
QEpoliciesdeployedbyadvancedeconomieswereparticularlycriticizedfor
adverseeffectsonemergingmarketcountries,primarilythroughcapitalflowsand
exchangerates.Investorssurgedintoemergingmarkets,increasingassetprices
andappreciatingcurrencies.Thesespillovereffectsunderminedexport
competitiveness,increasedexchangeriskondebtandthreatenedassetprice
bubbles.InMay2013,whenFederalReserveChairmanBenBernankesuggested
thatQEwouldbe‘tapered’,volatilityinemergingmarketassetpricesledtorenewed
callsforgreatercoordination.Thespecteroftheinter-warcrisisreturnedand(asin
43
theinterwarperiod)therewerecallsforgreatermonetarycooperationtoaverta
‘currencywar’(describedinEichengreen,2013b).
Theextentandcauseofspill-overeffectsisdisputed.Certainly,USmonetary
policyhasglobalimplicationsbecauseoftheimportanceofUScapitalmarketsand
theroleofthedollar.SpillovereffectsappeargreatestwhenFedannouncements
surprisethemarketsandthereisevidencethattheseeffectsweregreaterafterthe
globalfinancialcrisisthanbeforeit(Chenetal.,2014).Ontheotherhand,thereare
structuralfactorsinemergingmarketeconomieswhichcanmakethemmore
resilienttospillovers-suchashighergrowth,strongerbalanceofpayments,lower
shareoflocaldebtheldbyforeignersexanteandliquidityoffinancialmarkets.The
evidenceseemstosuggestthatadvancedeconomiesshouldavoidsurprisesand
carefullysignaltheirpolicytothemarketwhileemergingmarketeconomiesshould
reinforcetheireconomicfundamentalsandmarketliquiditytoincreasetheir
resilience.
Moreover,allowingafreefloatoftheexchangerateensuresthatemerging
marketscantargetindependentmonetarypolicyondomesticpricestability(andin
theshortrunoutputstabilityakaflexibleinflationtargeting)eveninthepresenceof
spill-overs.Ifmonetarypolicyisinsteadaimedatexchangeratestabilityor
promotingexportsthentheremaywellbechallengesforemergingmarket
economiestoabsorbspillovers(Ammeretal,2016).Taylor(2016)arguedthatitis
deviationsfromrulesbasedpoliciessince2002thathaveledtothespilloversand
thatthesolutionistoreturntothepoliciesfollowedintheGreatModeration.The
44
casethatgreatermonetarycooperationisanecessarysolutiontospillovereffectsis
notproven.
Butthereisalsoevidenceofexternalitiesthatpromotepro-cyclicalityand
systemicriskinfinancialmarkets,whichhaspromptedcallsformacro-prudential
policy-makingtoincreasefinancialstability(Claessens,2015).Thesepoliciesmay
complicatetheeffectiveuseofmonetarypolicydedicatedtolowinflation.
AttheNovember2008G20meeting(astheworldclamoredforasolution,and
villainswereidentified)newinstitutionswerecreatedtoprovideforafor
cooperation.TheIMFwastaskedwithmonitoringspillovereffects,publishingan
annualreport.TheFinancialStabilityBoard(2009)bringstogethercentralbanks,
financeministriesandsupervisoryagenciestoencourage‘coherentimplementation’
ofgoodpracticeandimplementagreedstandardsandcodes,undertakingpeer
reviewsofmacro-prudentialpolicyframeworks.Whileeasilydismissedas‘talking
shops’,theexchangeofinformation,ideasandcommunicationmaybearsomefruit
inthelongtermincreatingconsensusaroundacommonoragreedframeworkof
rules.
7.Conclusions
Anumberofconclusionsfollowfromoursurvey;
1. Monetarypolicycooperationgenerallyissuccessfulwhendoneinarules
basedenvironment.ThiswasthecaseundertheGoldStandardandinthe
GreatModeration.Cooperationintheseregimeswasdonefortechnicalor
45
LenderofLastResortreasonsandsupportedthecommunicationneededto
developasharedconsensusaboutwhatrulewasbest.
2. Monetarypolicycooperationdoesnotworkwhendomesticandinternational
policyprioritiesareinconsistent,i.e.whenaninternationalpolicyrule(e.g.
exchangeratestability)conflictswithdomesticgoalsofpricestabilityorfull
employment.Thus,theagreedinternationalrulesconflictedwithdomestic
prioritiesduringtheinterwargoldexchangestandard,theBrettonWoods
Systemandtheearly1980s.Undertheclassicalgoldstandardandduringthe
GreatModeration,bycontrast,thenominalanchorruleswereconsistent
withpricestability.
3. Itfollowsthatshorttermeffortsatinternationalmonetarypolicy
coordinationdonotworkwhentheyinvolveadeparturefromdomestic
policyfundamentalse.g.LongIsland1927andthePlazaandLouvreAccords.
4. Thecoordinatedrescuesoftheemergingcountriesinthefinancialcrisesof
the1990sweremainlybailoutsandwerenotbasedonBagehot’sprinciples.
Thispromotedfutureriskybehavior.Moreover,inanumberofcasesthe
recipientsdidnotgraduatetothemonetarypolicystrategiesoftheadvanced
countries,leadingtolaterinstability.Recentcooperation,largelythroughthe
BIS,hashelpedtocreateanepistemiccommunityofcentralbanksthathas
learnedtofollowrulesbasedpolicy.Thishasbeenbeneficialbutwillbe
challengedbytheadditionofnewmemberstotheBISgoverningboardand
bytheproliferationofmulti-agencygroups.
46
5. Areturntoarulesbasedsystemunderfloatingexchangeratesnowthatthe
GreatFinancialCrisisislongpastwouldprovideanenvironmentconducive
tostableeconomicgrowthandlowinflationfortheworldaswasthecase
duringtheGreatModeration.
Theevolutionofcentralbankcooperationandcoordinationsincetheclassicalgold
standardhascloselyfollowedtheevolutionofcentralbankcredibility(Bordoand
Siklos2014,2016).Undertheclassicalgoldstandardcentralbankshadhigh
credibilitybecausethegoldstandardrulewasprimarilyadomesticruleandthe
internationalgoldstandardrulefollowedfromthat(BordoandKydland1995).
Centralbankcooperationwasperfectlyconsistentwiththatarrangement.Inthe
GreatModeration,centralbanksenjoyedhighcredibilitybecauseunderfloating
exchangeratestheylearnedtofollowdomesticrulesbasedpolicyfocusedonprice
stabilityandhadtheindependencetopursuetheirtargetsconsistently.
Butintheinterveningsevendecades,centralbankcredibilitydeclinedbecause
theunderlyingtheoreticalandpoliticaleconomyframeworkdramaticallychanged
towardsmaintainingdomesticaggregatedemandandfullemploymentalongwith
fixedexchangeratesandthegoldconvertibilityrule--animpossibletask,which
becameevidentintheinterwarandlaterintheBrettonWoodsera,evenwith
capitalcontrols.Centralbankcooperationandcoordinationwaseffectivelyusedto
propuptheBrettonWoodssystemthroughshorttermfixes,butultimatelythese
regimesweredoomedbythegrowinginconsistencyofpolicygoals.Ittookthe
strainsoftheGreatInflationtocreatethelearningenvironmenttorestorecentral
bankcredibilityandidentifyasustainablerulebasedondomesticmonetarypolicy.
47
48
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