Redesigning the Architecture of the Global Financial System

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Redesigning the Architecture of the Global Financial System

Redesigning the Architecture of the Global Financial System

Douglas W Arner*1 and Ross P Buckley2

During the great period of globalisation before the First World War, the international economy was based on global trade and global finance with monetary policy largely fixed under the gold standard. After the Second World War, a new international system was designed based upon global trade, fixed exchange rates and essentially domestic finance. This system did not include global financial regulation as finance was to be largely nationally constrained. Over the succeeding decades, however, capital markets globalised. The consequences have been a return to a level of financial and monetary instability not seen since the period following the First World War. The most dramatic example of this instability is the global financial crisis of
2007–10. We argue in this article that there is a fundamental need to redesign the architecture of today’s global financial system to meet the requirements of this new reality, with established mechanisms to address economic coordination, macroeconomic and monetary management, development, and financial crisis prevention and resolution, as well as promote trade.


IIntroduction 2

IIThe International Financial Architecture: 1944–98 4

AThe International Economic Architecture as Designed 4

BThe International Economic Architecture in Practice: 1944–94 9

1The IMF and the International Monetary System 9

2Development and the World Bank 10

3Trade, the GATT 1947 and the WTO 12

4Coordination and Linkage 13

5Finance 14

IIIThe ‘New’ International Financial Architecture: 1998–2008 14

AFinancial Crises in the 1990s and the International Response 15

BFinancial Stability 16

CStructure and Process 17

DInternational Financial Standards and Standard-Setting Organisations 18

1Standard-Setting 19

2Implementation and Monitoring 20

EFinancial Liberalisation and the WTO 21

FDevelopment 22

IVThe Global Financial Crisis and the International Architecture 23

AThe G7, FSF and Major Central Banks 23

BThe G20 24

1November 2008 24

2Working Groups 27

3April 2009: The Second G20 Heads of Government Level Meeting 27

4September 2009: The Third G20 Heads of Government Level Meeting 31

5June 2010: The Fourth G20 Heads of Government Meeting 34

CThe IMF, MDBs and the WTO 35

VA New Design? 37

ACoordination 39

BTrade 40

CMacroeconomic and Monetary Policy 41

1Macroeconomic Policy 41

2Monetary Arrangements 42

DFinancial Stability and Development 42

1Crisis Prevention: Regulation 43

2Crisis Management: Liquidity 51

3Crisis Resolution 51

ESustainable Growth and Development 52

VIConclusion 53

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