Comment on Aliber’s “Capital Flows, Exchange Rates, and the New International Financial Architecture: Six Financial Crises in Search of a Generic Explanation”

Abstract

Robert Aliber’s article makes two main and interrelated points. The first is that today’s discussion on reforming the international monetary system is puny compared to the grand debate of the 1960s that tried to provide a solution to the Triffin paradox. Current discussion, instead, is ad hoc and is aimed at fixing specific crises rather than looking at the system as a whole. Aliber characterizes today’s debate as sterile “because there is so little agreement on the source of the problem.” The second is that private decentralized decisions by investors involve some type of market failure in that these “investors fail to recognize the impact of their purchases of a foreign security on the foreign-exchange value of the country’s currency and on asset prices in the capital-importing countries. Asset prices tend to increase in countries experiencing an increase in the inflow of foreign capital; similarly, the currency tends to appreciate. Conversely, the currency depreciates as the capital inflow declines.”