None of these conditions will likely hold in the future. The first condition no longer exists, as exhibited in the figures above even though the US economy is likely to remain the largest economy in the world for another five to ten years. As will be discussed below, instability in the multi-polar monetary system of the future would be a clear motivation for a reform of the system. Recent developments in the United States, including the S&P downgrade in August, 2011 from AAA to AA+ of long-term US sovereign debt serves as a warning side to the last condition.

**Emerging Policy Challenges and Pressures on the International Monetary System.** The first dozen years or so following the demise of the Bretton Woods system was a tumultuous period in the international monetary system.  Two oil price shocks complicated the panorama for monetary policy at the national level.  Inflation reached double digits in the United States and a number of other major economies.  Since the mid-1980s, the adoption of inflation-targeting by central banks in major economies has succeeded in stabilizing prices.  GDP growth appears to have become less volatile – at least up to 2007 as noted in Figure 3—especially in reserve currency countries.  That said, there have been a series of asset price bubbles in the United States, and the high-income countries are still staggering from the effects of the 2008-2009 financial crisis.

The United States may have experienced a “great moderation”<sup>31</sup> prior to the global crisis (Figures 3(a) and (b)); however, this may have been a function of its dominant role in the international monetary system—among many other possible explanations. A number of other leading economies experienced a reduction in growth volatility (as measured simply by the standard deviation of GDP growth, Figures 3(c)-(e)); however, some of the newly industrialized countries that do not belong to the club of reserve currency issuers suffered from high volatility (for example, Korea). Even a number of star performers from the emerging economies were impacted by the crises of the last few decades. Can the international monetary system evolve in a way that would help reduce future volatility for a broader set of countries?

**Figures 3(a)-(l): Growth Volatility in the United States and Other Selected Economies, (8 quarter moving standard deviation)**

<!-- Start of picture text --> (a) United States: Standard Deviation of Real (b) US: Standard Deviation of GDP growth,<br>GDP Growth, % points) period averages, % points<br>1.2<br>2.5<br>1<br>2<br>Global<br>Crisis 0.8<br>1.5<br>Tech<br>1 S&L Crisis Bubble 0.6<br>0.5 0.4<br>0 0.2<br>0<br>1949-1971 1972-1985 1986-2008 2009-2011(iii)<br>1949 Q1 1952 Q1 1955 Q1 1958 Q1 1961 Q1 1964 Q1 1967 Q1 1970 Q1 1973 Q1 1976 Q1 1979 Q1 1982 Q1 1985 Q1 1988 Q1 1991 Q1 1994 Q1 1997 Q1 2000 Q1 2003 Q1 2006 Q1 2009 Q1<br><!-- End of picture text --> 31 A classic paper on this topic is Stock and Watson (2003). The concept is not without controversy: for example, Smith and Summers (2009) find that the lower volatility is due to more modest growth during expansions, while periodic recessions have been less frequent but equally severe .

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