Marina von Neumann Whitman

The Architecture and Future of the International Monetary System

There is a great deal of dissatisfaction with the architecture and functioning of the present international monetary system and this gives rise to persistent calls for reforms. Although these are most insistent during periods of crisis, such as at the time of the collapse of the Bretton Woods System in the early 1970s, the foreign debt problem of LDCs in the early 1980s, and the financial crises in emerging markets during the second half of the 1990s, they are heard even during periods of relative tranquility in international financial markets such as now. Dissatisfaction with the functioning of the present international monetary system arises because of excessive volatility and misalignments of exchange rates as well as a result of its inability to prevent or quickly resolve international financial crises. Uncertainty also arises from the move toward monetary unification in the European Union and the creation of the Euro, which seems to be pushing the world toward a tri-polar monetary system based on the dollar, the Euro and the yen. The reforms demanded most consistently are for a move to a system in which exchange rates are more stable and less flexible and emerging market economies are less prone to disruptive financial crises.

The Open Economy Macromodel: Interactions between Theoretical Developments and Real-World Behavior

The development of the open-economy macro-model over the past half century can be viewed as a running, and still uncompleted, saga of the interaction between advances in economic theory and developments in the practitioners’ world where economic policies are formulated and international economic transactions take place. As Maurice Obstfeld, one of the major contributors to, as well as the leading synthesizer of these developments in macro-theory, notes: “Frequently, prominent international policy problems, even crises, provide the inspiration for new [theoretical] explanations ” (Obstfeld 2000b, 1).