WORKING PAPER 11-5

Integrating Reform of Financial Regulation with Reform of the International Monetary System

by Morris Goldstein, Peterson Institute for International Economics

February 2011

This paper links reform of the international financial regulatory system with reform of the international monetary system because as this recent global crisis demonstrates so vividly, the root causes can come from both the financial and monetary spheres and they can interact in a variety of dangerous ways. On the financial regulatory side, Morris Goldstein highlights three problems: developing a better tool kit for pricking asset-price bubbles before they get too large; shooting for national minima for regulatory bank capital that are at least twice as high as those recently agreed to as part of Basel III; and implementing a comprehensive approach to "too-big-to-fail" financial institutions that will rein-in their past excessive risktaking. On the international monetary side, Goldstein emphasizes what needs to be done to discourage "beggar-thy-neighbor" exchange rate policies, including agreeing on a graduated set of penalties for countries that refuse persistently to honor their international obligations on exchange rate policy.

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