Journal Article

Financial Stability and Monetary Policy: Need for International Surveillance

Gary Hufbauer and Daniel Danxia Xie

in Journal of International Economic Law

Volume 13, issue 3, pages 939-953
Published in print September 2010 | ISSN: 1369-3034
Published online December 2010 | e-ISSN: 1464-3758 | DOI: https://dx.doi.org/10.1093/jiel/jgq035
Financial Stability and Monetary Policy: Need for International Surveillance

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In this article, we propose a new monetary framework that defines a broader set of assets, De Facto Money (DFM), as the benchmark for improving financial stability. DFM is defined as traditional monetary aggregates plus other liquid assets such as stocks and bonds. Empirical evidence for the USA, other Organisation for Economic Co-operation and Development countries, and a few emerging countries lends strong support for the connection between exceptionally fast growth of DFM and subsequent financial instability. We recommend several potential policy instruments to implement the new monetary framework. Due to cross-country spillovers from national financial crises, we suggest that international surveillance will be necessary to monitor DFM and thus the underlying conditions for financial stability in major countries. We argue that the International Monetary Fund is the ideal institution to carry out this task in terms of its reputation and expertise.

Journal Article.  5818 words.  Illustrated.

Subjects: Financial Law ; Public International Law ; Economics

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