Reforming the international monetary system: a stock-flow-consistent approach

Abstract:

The emergence and persistence of large trade imbalances as well as the volatility of financial flows among countries have been attributed, at least in part, to the inadequacy of the current international monetary system after the breakdown of Bretton Woods. From a different perspective, the current eurozone crisis is also the result, in our view, of a flawed institutional setting. These problems call for reforms to mitigate or avoid the recessionary bias that is the outcome of current systems, as Keynes predicted in the discussion preceding the Bretton Woods agreements. In this paper we briefly review the evidence on international imbalances, and survey the rapidly growing literature on the subject. We introduce a set of models based on the stock-flow-consistent approach pioneered by Godley (1999) and Lavoie and Godley (2003). We discuss how to use these models to explore potential reform of the international monetary system.

Key words::

• bancor
• international monetary system
• stock-flow-consistent models

JEL codes::

• F02
• F33
• F41
• E12

Notes

¹Many authors have since endorsed this definition.

²For similar reasons, a reform of the treaties establishing the eurozone is needed, because the current setting imparts deflationary pressures once one or more countries has to follow austerity policies.

³However, holdings by foreign official institutions of U.S. Treasury securities amounted to $4 trillion at the end of 2014, or 67 percent of total foreign holdings.

⁴A model aiming at discussing current global imbalances should represent simultaneously the countries we list plus oil exporting countries, which also exhibit external surpluses. This is left for future exercises that take into account the effect of oil prices on economic activity.

⁵Exchange rates for the the first n−1 countries imply the nth exchange rates, and therefore it is not possible for all countries to target given exchange rates, unless they are mutually consistent. We will return to this issue when we discuss different model closures.

⁶The model consists of approximately 230 equations and it is not reported here for space consideration, but it is available at http://models.sfc-models.net/vz2015/models.pdf.

⁷Tighter than what national accounts usually do because only few countries report flows in a solvency assessment and management (SAM) framework, whereas most other countries report receipts and outlays separately for each sector.

⁸Although the model allows for exploring the effect of exogenous changes in this distribution.

⁹The Eviews code is available at http://models.sfc-models.net/vz2015/usdollar.prg.

¹⁰See Lavoie and Zaho (2010) for a model that addresses this issue.

¹¹We have verified this statement through alternative closures of the model where the exchange rate was determined to clear the current account, and model behavior did not change.

¹²The Eviews code is available at http://models.sfc-models.net/vz2015/sdr.prg.

¹³The Eviews code is available at http://models.sfc-models.net/vz2015/bancor1.prg and bancor2prg.

¹⁴The relevant accounting matrixes are available at http://models.sfc-models.net/vz2015/models.pdf.

¹⁵In alternative model settings we also allow for international transactions in bonds.

¹⁶Results from the simpler stationary model are qualitatively similar, but the positive link between profits and the rate of capacity utilization and investment, and the negative relation between the interest rate and investment are absent.

¹⁷The path for China and the Rest-of-the-World blocks are the same in Figure 2.

¹⁸Available from http://models.sfc-models.net/vz2015/sdr.prg.

Additional information

Notes on contributors

Sebastian Valdecantos

Sebastian Valdecantos is Economic Affairs Officer at the Economic Commission for Latin America and the Caribbean (United Nations).

Gennaro Zezza

Gennaro Zezza is Associate Professor at Università di Cassino e del Lazio Meridionale, Italy, and Research Scholar at Levy Economics Institute of Bard College.