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5 - Exchange Rates, Capital Flows and the Financial Cycle

On the Origins of the BIS View

Published online by Cambridge University Press:  10 April 2020

Claudio Borio
Affiliation:
Bank for International Settlements
Stijn Claessens
Affiliation:
Bank for International Settlements
Piet Clement
Affiliation:
Bank for International Settlements
Robert N. McCauley
Affiliation:
Bank for International Settlements
Hyun Song Shin
Affiliation:
Bank for International Settlements
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Summary

Based on a thorough analysis of the BIS Annual Reports from the early 1970s to the late 2010s, this chapter traces the evolution of the BIS’s thinking on the international monetary and financial system. It demonstrates how – as a result of the growth of the Eurocurrency markets in the 1970s and of the sovereign debt crisis of the 1980s – the BIS’s traditional focus on exchange rates and their potential impact on monetary stability gradually shifted to global capital flows and to the risks posed by an increasingly complex and interconnected banking system. The 1995 Mexico crisis and 1997–8 Asian crisis reinforced this shift and led to an overriding concern with the procyclicality of the financial system as a potential threat to financial stability. While recognising that the focus of the BIS on a macro-financial stability framework has contributed a lot to advancing the work of the Basel-based committees and standard-setting bodies, the chapter also concludes that not much progress has been made in coordinating monetary policies or in addressing the fundamental problem of excessive elasticity of the financial system.

Type
Chapter
Information
Promoting Global Monetary and Financial Stability
The Bank for International Settlements after Bretton Woods, 1973–2020
, pp. 168 - 205
Publisher: Cambridge University Press
Print publication year: 2020

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