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Discussion Paper

No. 2008-32 | October 15, 2008
Global Governance of Global Monetary Relations: Rationale and Feasibility


Is there a valid argument for international cooperation, and some form of international governance structure, in the international monetary realm? On the purely economic front, the argument is not strong. Yet a broader political economy approach concludes that national currency policy can in fact impose non-pecuniary externalities on partner nations. This is especially the case with major policy-driven misalignments, which cannot easily be countered by other governments. For example, one country’s substantially depreciated currency can provoke powerful protectionist pressures in its trading partners, so that exchange rate policy spills over into trade policy in potentially damaging ways. In as much as one government’s policies create these sorts of costs for other countries, and for the world economy as a whole, there is a case for global governance. This might include some institutionalized mechanism to monitor and publicize substantial currency misalignments. While there appears to be little global political attention to such a mechanism now, there have been initiatives along these lines at the regional level, and there are some early stirrings of interest more generally.

Paper submitted to the special issue “Global Governance—Challenges and Proposals for Reform

JEL Classification

F42 H87

Cite As

Jeffry Frieden (2008). Global Governance of Global Monetary Relations: Rationale and Feasibility. Economics Discussion Papers, No 2008-32, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-32


Comments and Questions

Niklas Potrafke - Referee Report
December 03, 2008 - 09:40

see attached file

Jeff Frieden - Response to Referee Report
December 05, 2008 - 09:42

Thanks very much for the excellent report. It is much appreciated.

As for a response, I guess I have several reactions.

1. The referee is absolutely right in pointing to the relative weakness of the positive political economy component of the paper. And I share ...[more]

... his skepticism that a more general public choice/political economy analysis might demonstrate. There has been little cooperation in this sphere, and we must conclude that this is probably because there is little political incentive for such cooperation.

2. This said, I took as my purpose in this paper the statement of a strong policy-oriented view. I mentioned briefly the feasibility (or lack thereof) -- with some skepticism. I think that a full-fledged assessment of the positive implications would require another paper at least as long as this one!

3. The current crisis may in fact be compelling a bit more public and policymaking concern on these issues, and so the prospects for actual cooperation may be greater now than they were previously.

But generally, my reaction is that the reader is exactly right. I am not sure that this failing of the paper can be corrected, but if you or the editor has suggestions about how to address it, I am very open to hearing them.

Anonymous - Referee Report
December 22, 2008 - 10:48

see attached file

Jeffry Frieden - Response to Referee Report
January 09, 2009 - 09:14

This is another fine review. The several minor remarks are easily addressed. The more significant ones are major points, which raise a series of important issues. I think the main thrust is to ask for a clear differentiation between small economies and the major financial centers. ...[more]

... Certainly I should clarify, as the reviewer suggests in his point 1, that my arguments with regard to cooperation are aimed primarily at the principal financial centers. Beyond that, the reviewer raises a central issue in his points 2 and 3, which is how we might imagine the emergence of monetary coordination and exchange rate stabilization among major financial centers. This echoes the concerns mentioned by the first reviewer, about the feasibility of the ideas expressed here.

Let me reiterate that my purpose in the essay was to state, as boldly and positively as I could, the normative case for policy cooperation in this realm. I did try to indicate that even I feel some skepticism about the realism of the proposals. However, the fact that both reviewers focus on questions of feasibility and practicality suggests that I should address this more directly. I think that this can be done, perhaps most especially with regard to the current environment. For it is clear that one of the major challenges facing the world's principal financial centers today is to adopt appropriate national (or in the case of the ECB regional) monetary policies while avoiding some of the potential beggar-thy-neighbor implications of such policies. On the one hand, policies that lead to a depreciation of the real exchange rate may well be appropriate to address the need for adjustment of the current account, as in the United States. However, such a depreciation could also spur protectionism on the part of trading partners, and could cause substantial dislocations in international investment and financial flows. So I think I can and should make a bit more explicit -- perhaps in the context of the current crisis -- that the normative case for cooperation might well be strengthened by the clearly negative implications of national-level responses imposing serious costs on partners, in ways that could conceivably lead to severe conflicts among them. I am reminded of the "currency wars" associated with "competitive devaluations" in the 1930s; perhaps greater awareness of this would encourage more positive steps to avoid the problem.