fabrizio saccomanni : the global crisis and the future of the international monetary system speech by mr fabrizio saccomanni, director general of the bank of italy, at the chinese academy of social sciences, beijing, 15 april 2010. * * * the global crisis that hit the world economy since august 2007 has revived the long dormant debate about the adequacy of the institutional arrangements required to ensure stability in international economic and financial relationships on a global scale. the financial roots of the crisis have been widely analysed. here, i intend to focus more on the macroeconomic drivers. i will try to argue that they are ultimately connected to a number of long - standing features of the international monetary system such as it has evolved since the demise of the bretton woods regime. i will then review the main options available to reform the international monetary and financial system. 1. the global crisis and its macroeconomic roots there is now a broad consensus that, even though the global crisis was triggered by dysfunctions in the financial system, unbalanced global macroeconomic conditions contributed to the accumulation of large financial vulnerabilities ( visco, 2009 and 2010 ). the proximate cause of the crisis was the us housing boom, financed by an unprecedented expansion of mortgage lending. regulators ’ failure to correct the incentive distortions introduced by financial innovation can largely explain the deterioration of lending standards, the widespread use of opaque financial instruments and the excessive risk - taking on the part of many international banks. excessively easy monetary conditions contributed to encourage the rapid growth in mortgage borrowing and fed the rise in house prices. an easy monetary policy in the us and japan – and, to a lesser extent, in the euro area – translated into a loose global monetary stance. very low interest rates in main financial centers encouraged capital flows to economies with higher interest rates, which were induced to ease policy in turn, in order to avoid an excessive currency appreciation. countries that pegged their exchange rate to the dollar effectively adopted the us monetary policy stance, and absorbed capital inflows by accumulating large official reserves. the investment of official reserves in us treasury securities financed the growing us current account deficit and, at the same time, contributed to keep treasury bond yields low. investors turned increasingly toward riskier assets in their “ search for yield ”, leading to a compression of risk premia on a broad range of financial assets, from equities to corporate and sovereign bonds, thereby boosting asset

) ; strengthening the robustness of the over - the - counter ( otc ) derivatives market ( strengthening capital requirements and incentives, moving to central counterparties or organized exchanges ) ; objective of convergence, the enormous complexity of the technical issues at stake, the strength of conflicting vested interests and the expanded number of participants in the negotiations explain why the process of financial reform is still underway more than two years after the outbreak of the crisis. nevertheless, a high degree of consensus has been reached on the main components of the reform and it seems unlikely at this stage that the process will be stalled. * * * the outline of a new international monetary system is being drafted within the g20 and in the broad fora of the academic community of the public opinion. the main pillars of a new system – a stability oriented anchor for macroeconomic policies ; an open multilateral trading system ; a more resilient and risk - averse regulatory regime ; a reserve regime based on a multilateral asset – are in different stages of construction. the world economy shows signs of recovery but it is essential that the pace of reform is not slowed down. it is imperative to reduce significantly the risk for the world economy of a devastating crisis such as the one we have just experienced. this requires to tackle the potential sources of instability that lie in our very imperfect international monetary arrangements. references alessandrini, p. and m. fratianni ( 2009 ), “ dominant currencies, special drawing rights and supranational bank money ”, world economics, vol. 10, no. 4, oct. / dec. bergsten, c. f. ( 2009 ), “ the dollar and the deficits ”, foreign affairs, vol. 88, no. 6, november / december. cooper, r. ( 2009 ), “ the future of the dollar ”, peterson institute for international economics, policy brief pb09 – 21, september, http : / / www. iie. com / publications / pb / pb09 – 21. pdf. eichengreen, b. ( 2009 ) “ the dollar dilemma ”, foreign affairs, vol. 88, no. 5, sept. / oct. greenwald, b. and j. stiglitz ( 2008 ), “ a modest proposal for international monetary reform ”, international economic association meeting, istanbul, june, http : / / www0. gsb. columbia. edu / ipd / pub