Intervention versus Regulation

This new working paper investigates the roles the International Monetary Fund (IMF) might play given its mandate to
provide institutional support for a global capital market that can promote trade and investment, and given current
worldwide economic instabilities such as highly volatile exchange rates.

The experience of steady growth and price stability under the Bretton Woods system is often cited in support
of a return to a managed fixed-rate system. Author E. V. K. FitzGerald contends, however, that although exchange rate
instability might be related to the major financial crises of the past 20 years, such instability is not the source of
financial crises; rather, factors such as the worldwide integration of financial markets and the development of
heterogeneous financial instruments have created new sources of instability. In the new worldwide financial
system exchange rates function as asset prices (that is, they reflect international capital flows) as well to
regulate trade flows. Current account balances are, then, more likely a function of internal imbalances than of
trade imbalances. Moreover, because interest rates reflect the desire to hold a given stock of bonds, their
fluctuation does not cause international capital markets to clear (that is, cause saving to equal investment on a
global scale).