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 Financial Stability as a Global Public Good


Hélène REY * Lord Bagri Professor of Economics, London Business School, Regent's Park, London; Research Fellow, CEPR (Centre for Economic Policy Research), NBER (National Bureau of Economic Research ) and ABFER (Asian Bureau of Finance and Economic Research). Contact: hrey@london.edu.This article does not necessarily reflect the views of the Haut Conseil de Stabilité Financière, of which the author is a member.

The international financial system remains centered on the dollar, which is by far the main reserve currency; the monetary policy of the US Federal Reserve has an important bearing on the Global Financial Cycle. The United States, as hegemon, plays the role of world banker and underwrites the globalized economy in times of crisis, becoming lender of last resort via swap lines. The US thus contributes to the provision of financial stability, an important global public good. Its role must of course be supplemented by robust prudential regulations, active use of macroprudential policies, in some cases capital controls, and by the actions of the Bretton Woods institutions, in particular the International Monetary Fund. With the relative size of the United States shrinking in the global economy, the international monetary system potentially faces a new Triffin's Dilemma: the demand for dollar liquidity grows with the global economy while the fiscal capacity of the United States, which guarantees the value of the American currency, decreases in relative terms. Moreover, the existing global financial architecture seems so far incapable of channeling capital to where it would have high marginal social value, helping produce those other global public goods of combating climate change and preserving biodiversity.

Kindleberger (1986) defines global public goods as “the set of goods accessible to all states that do not necessarily have an individual interest in producing them”. The most frequently cited global public goods are peace and the preservation of the planet, whether it be in terms of biodiversity or climate change. From an economic point of view, the Great Depression of the 1930s brought to the fore such public goods as the importance of an open, regulated international trading system and of political and economic institutions that guarantee financial stability. These institutions must, of course, seek to avoid crises, but also be capable of dealing with them when they do occur, thanks in particular to the existence of a global lender of last resort.It's worth recalling here the enormous cost of financial crises. Laeven and Valencia…