Journal of Financial Economics

REF 145 The International Monetary and Financial System Faces New Shocks

The development of open finance after the open banking architecture is a challenge for financial markets, regulators and central banks. These ongoing changes make it possible to envisage even more accessible, efficient and innovative financial services, while at the same time raising new challenges for both market players and public authorities.

Faced with a proliferation of new infrastructures that are no longer interoperable, the risk is that of market fragmentation and liquidity. The solutions lie in regulations that encourage cooperation between private players and complement the action of public authorities to establish a regulatory framework that is clear, and sufficiently flexible to take into account the rapid evolution of the market and of innovations.

Institutional players can play a role as a catalyst for private initiatives in standardization. Competition must also allow for an increase in the quality of APIs – we speak of premium API. A program of experimentation with new technologies has been launched at the Banque de France. These experiments have shown that an inter-bank digital currency would not only maintain but also promote central bank money as the safest and most liquid settlement asset, while adapting it to changes in demand and thus avoiding the fragmentation of settlement assets.

Will the dollar remain the dominant reserve currency, despite the excessive indebtedness of the United States, and in the absence of a credible substitute for the dollar? Will US monetary policy continue to favor domestic situations without considering the externalities on emerging countries? Will external financing of the US become more difficult? This would lead to a depreciation of the dollar, with the sharp increase in the external debt of the United States, the desire of Europe to keep its savings for investment, and the desire of emerging countries to limit capital outflows. Or are we going to enter a new system to limit the destabilizing variability of international capital flows: selective capital controls, stronger reaction of monetary policies to exchange rates.

Will the International Monetary System continue to be privatized, with an increased role for equity capital flows, and thus for the attractiveness of companies, compared to public debt capital flows?

This paper attempts to answer these different questions which are crucial for the future of the international financial system.

This paper assesses heterogeneity between member countries of the eurozone, and its evolution over time, by measuring their disparities in terms of equilibrium exchange rate paths. Relying on cluster and factor analyses, we highlight the existence of two groups of countries before the launch of the euro; Greece between identified as an outlier. Extending the period under study, our findings suggest that the configuration of the euro area has become more fragmented since the launch of the single currency as dissimilarities across and within groups of countries have increased.

This article presents some of the issues involved in secular stagnation, a phenomenon that can be summarized as a combination of three phenomena: downward trajectories in potential growth rates over several decades, interest rates that have also been on a downward trend for several decades, and persistent deflationary pressures over time. Industrialized countries have been confronted with these phenomena since the mid-1980s. Potential growth influences natural interest rates, which are a long-term attractor for observed real rates. The article presents some theoretical interpretations of the determinants and evolution of natural rates, as well as empirical measures obtained for different countries. We emphasize the role of financial markets and the consequences of the phenomenon of « gluttony » of savings. From the point of view of monetary policy, a difficulty in converging the observed real rates to the natural rates may arise in a low inflation regime when the nominal interest rate is constrained by the zero lower bound. Expansive fiscal policies may be recommended to make the two rates converge.

Can the plaza agreement, which aimed to limit the dollar's excessive rise, be repeated today? obviously, conditions have changed and the real risk for the world economy is twofold, that of significant currency and exchange rate volatility and the still hypothetical but real risk of a fall in the dollar. the article attempts to consider these different categories through the evolution of foreign exchange markets and central bank policies over the last twenty years.

In response to the invasion of Ukraine, the assets of the Central Bank of Russian Federation have been frozen by the US, EU, UK, Canada, Japan, Australia and Switzerland. This is the first time in history that action involving all G7 members has been taken against a central bank of the G20. The reserve freeze highlights the impact of strategic alliances on a central bank's ability to mobilize their reserves. This could be a catalyst for a trend already underway to diversify portfolio reserves, particularly into « non-traditional » currencies such as the Chinese yuan but also the Canadian dollar, Korean won and Swiss franc amongst others. By incorporating a more geopolitical dimension, reserve accumulation strategies could increase the risks of regionalization and fragmentation of the International Monetary System.

The Global Financial Safety Net (GFSN) has evolved over the past decade. While the IMF remains at its centre and even more after the August 2021 SDR allocation, its regional dimension has been comforted by the establishment of the European Stability Mechanism in the euro area. The other striking feature of the GFSN evolution has been the robust growth of foreign exchange reserves, indicating a persistent resistance to calling on the IMF and a preference for self-insurance. This article presents a historical analysis of financial crises in the past thirty years. These findings highlight that these crises have a strong regional component, which calls for a GFSN, stronger at the global rather than at the regional level.

The states who agreed with the Paris Agreement in 2015 committed themselves to act to limit global warming. This fight against climate change also concerns central banks. They will design tools to support assets financing low-carbon activities and conversely negatively value assets financing high-carbon projects. Buying « green » assets, giving preferential treatment to green assets eligible as collateral or setting up dedicated long-term facilities: the list of possibilities is long. But should we not fear a risk of « politicization » of central banks and a « mission creep » beyond their mandates to fight inflation or support activity?

The article shows that central banks have three levers at their disposal: improving their macroeconomic models to better understand macroeconomic modeling to better understand the implications of climate change for monetary policy; transparency requirements, which are both an objective of the European Union and a lever for the private sector. Making policies comparable across all countries is precisely the « raison d'être » of the Network for Greening the Financial System (NGFS).

A new international financial architecture is emerging, characterized by the normalization of some forms of capital control and the rise of bilateral loans between central banks. The issues of diplomacy and financial stability are intertwined. If authoritarian states with centralized power and without independence of central banks naturally find their account in this new state of the world, the monetary and financial institutions of democratic countries must establish a new legitimacy for their interventions that affect financial relations with foreign countries. Central banks cannot act alone and it is necessary to explicitly coordinate their action with other aspects of economic and foreign policy. This is as much a question of policy effectiveness as of democratic legitimacy.

With regard to the situation of emerging market and developing economies, this paper examines the issue of potential controls on capital flows. It begins by analyzing the IMF's position, redefined in March 2022, in the form of an Institutional View on the liberalization and management of capital flows. We then present the macroeconomic and macro-financial externalities that international capital flows generate and that justify this shift, both on the IMF's side and at the level of governments or central banks within the emerging countries. Finally, the question of the effectiveness and conditions of implementation of this new surveillance of capital flows within the framework of an expanded policy mix is raised.