The International Monetary and Financial System: A Capital Account Historical Perspective

32 Pages Posted: 12 Sep 2014

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Harold James

Princeton University - Department of History; National Bureau of Economic Research (NBER)

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: September 2014

Abstract

In analyzing 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 lasticity". 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.

Keywords: excess financial elasticity, banking glut, current account, capital account, financial cycle, financial crises

JEL Classification: E40, E43, E44, E50, E52, F30, F40

Suggested Citation

Borio, Claudio E.V. and James, Harold and Shin, Hyun Song, The International Monetary and Financial System: A Capital Account Historical Perspective (September 2014). BIS Working Paper No. 457. Available at SSRN: https://ssrn.com/abstract=2495013

Claudio E.V. Borio (Contact Author)

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Harold James

Princeton University - Department of History ( email )

Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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