International Financial Governance under Stress: Global Structures versus National Imperatives

By Geoffrey R.D Underhill; Xiaoke Zhang | Go to book overview

2

Costs and benefits of financial
globalisation: concepts, evidence
and implications

JOHN WILLIAMSON

In order to have a rational discussion of what should be done to redesign the international financial architecture, it seems natural to start by making sure that we all agree on the basic analytical framework, on what we mean by financial globalisation and what we judge the qualitative nature of its costs and benefits to be. That is what I shall take as my terms of reference in this chapter.

The term ‘financial globalisation’ is generally taken to mean the integration of capital markets across countries, and, specifically, the belief that this now encompasses most of the world. It does not include monetary globalisation, meaning the global use of a single currency. In fact, outside Europe, there has until recently been almost no sign of monetary integration. It remains to be seen whether the current flurry of interest in dollarisation will translate into the beginning of a widespread movement to curtail the number of currencies.

But for the moment it is the bond market rather than the money market that is unified, in the sense that agents in one political jurisdiction have become willing to hold an unlimited proportion of their portfolio in securities issued in a different country. Similarly, borrowers have become willing to see an unlimited proportion of the securities they issue held by the residents of a different political jurisdiction. Such unification is possible whatever the exchange rate regime, although there is currently a lively debate as to whether capital market integration does not imply going to one or other of the extreme exchange rate regimes (either dollarisation or free floating, the so-called ‘two corners’ view). My own view is that the theorem of the ‘impossible trinity’ – the impossibility of having simultaneously a fixed exchange rate, an independent monetary policy and free capital mobility – can perfectly well be resolved by seeking an interior solution rather than going to one or other of the corners, but it seems that this is a minority view.1

It is of course an exaggeration to imply that all countries are now plugged into a single global capital market. In fact, if one were to weight countries by

Copyright 2002 Institute for International Economics.

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