Redesigning the architecture of the global financial system

Abstract

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.