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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
The international monetary and financial system: a capital account perspective
Claudio Borio
Harold James
Hyun Song Shin
Abstract

In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its “excess financial elasticity”. And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis.


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Claudio Borio & Harold James & Hyun Song Shin, The international monetary and financial system: a capital account perspective, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 204, 01 Oct 2014.
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DOI: 10.24149/gwp204
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