New International Financial Arrangements

The paper addresses three related issues about monetary institutions. First, acting alone countries cannot achieve price and exchange rate stability. Large economies--the United States, Japan, the European Union--can provide the public good of price stability. Doing so would permit all countries that chose to do so to fix their exchange rates and achieve both benefits. In turn, the large economies would benefit from fixed exchange rates and domestic price stability. Second, to respond to the increased size of capital flows, the International Monetary Fund (IMF) should be changed from a command and control institution into an institution that works to stabilize international financial markets by increasing incentives for stability. Third, recent discussion of international bankruptcy, collective action clauses, and debt rescheduling proposals suggests that reform of international financial institutions has attracted new attention. The paper discusses three proposals.