Financial Market Stability and Monetary Policy

There are three central questions that I want to address today. The first is, what is the first role of the monetary policy on economic performance and stability especially in response to a crisis. I am going to argue that the use of monetary policy in response to the Asian financial crisis was worse than ineffective: it worsened the economic downturn and, worse still, contributed to global economic instability. I want to go from this description of what was wrong with the policies and economic analysis underlying them to the question of why were these economic policies pursued. This is part of what is called the political economy of the crisis, trying to understand the behaviour of the institutions responsible for formulating the policies. I would argue that we have spent too little time thinking about the behaviour of the international economic and financial institutions, given the important role that they play today in the global economy. I am going to argue that the International Monetary Fund (IMF) changed the mandate from Keynes’ original conception. Keynes was one the conceptual founders of the IMF. He believed, or at least hoped, that such an institution would contribute to global stability, not to global instability. What I am going to argue is that it had changed its mandate from focusing on global financial stability and to providing liquidity to countries facing economic downturns, in order to sustain their economies at as close to full employment as possible, to pursuing an agenda that reflected the special interests of the financial community, in its worst manifestation to becoming if not the bill collector of the advanced industrial countries, an institution at least to enhance the likelihood that the creditors will be repaid. How do we explain this change of mandate? I want to suggest that it has to do with the governing structure of the institution. The final question, which I shall have time to touch on only briefly is, what reforms should be undertaken, to make it more likely that the IMF returns to its original mission. (I should say that I believe that there is at least a potential