Rationale in era of globalization, Microeconomics

Rationale in era of globalisation:

In the present era of globalisation where countries have unprecedented access to international capital flows and where those who have borrowed from the Bretton Woods Institutions are doing everything they can to repay their loans, it has been suggested that the Bretton Woods Institutions should closed down, and hence the slogan "sixty is enough". But it would be too radical a suggestions. For the reasons to be detailed below, not only there is a need for further strengthening of these institutions, there is also a new to restructure them.

Rationale

The rationale for the existence of the Bretton Woods institutions can be grouped in three categories as follows:

A) Dealing with Global Externalities

i) Global financial stability and episodes of systemic risk. National monetary authorities may address some but not all of these cases. In a world of greater financial integration, less capital controls, more capital mobility, not money and fickle investors, crises in past triggered by sudden reversal of capital flows cannot be ruled out.

ii) "Irrational" international investors' may derive from payoff externalities (leading to runs), information asymmetries and informational cascades leading to herding behaviour.

iii) Contagion from crisis country to other emerging markets and to advanced economies.

iv) Warning against externalities from poor economic policies and possible need for policy coordination.

v) External effects of liquidity runs and insolvency crises that lead to high liquidation costs.

vi) Need for international financial supervision. 

vii) Need for mechanisms for orderly debt workouts.

viii) Need to avoid competitive devaluations wars (that may be proxies for trade policy wars) and severe currency (financial crisis that are highly disruptive of global trade. 

ix) Ensure success of globalisation in all its forms (fee trade in goods and services FDI and transfer of information and technologies across countries, increased stable capital mobility and integration, appropriate management of labour migration).

Posted Date: 11/9/2012 6:30:45 AM | Location : United States







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