The International Monetary System and the Available International Policy Options for Emerging Countries

This paper discusses how the available international monetary policy options for emerging countries changed over time during the post-Bretton Woods era in view of the trilemma. Upon the liberalization of the emerging countries’ capital account, emerging countries suffered from excess volatility and economic crisis. They piled up reserves to survive in the region of free international capital mobility, but further reserve accumulation might not be sustainable in the future. Preventing the negative consequences of highly volatile international capital flows by providing global liquidity properly will dictate the available policy combinations for emerging countries. A fundamental reform on the international monetary and global liquidity provision systems will assist emerging countries in coping with liberalized capital accounts. However, the implementation of such a reform will take a long time. In this case, properly developed financial safety nets may help emerging countries in the interim. Otherwise, emerging countries have no choice but to impose capital controls. Advanced countries should understand the emerging countries’ options and strive with these countries to implement an international monetary system reform that can reflect the recent worldwide developments.