Financial Stability as a Global Public Good

The international financial system remains centered on the dollar, which is by far the main reserve currency; the monetary policy of the US Federal Reserve has an important bearing on the Global Financial Cycle. The United States, as hegemon, plays the role of world banker and underwrites the globalized economy in times of crisis, becoming lender of last resort via swap lines. The US thus contributes to the provision of financial stability, an important global public good. Its role must of course be supplemented by robust prudential regulations, active use of macroprudential policies, in some cases capital controls, and by the actions of the Bretton Woods institutions, in particular the International Monetary Fund. With the relative size of the United States shrinking in the global economy, the international monetary system potentially faces a new Triffin's Dilemma: the demand for dollar liquidity grows with the global economy while the fiscal capacity of the United States, which guarantees the value of the American currency, decreases in relative terms. Moreover, the existing global financial architecture seems so far incapable of channeling capital to where it would have high marginal social value, helping produce those other global public goods of combating climate change and preserving biodiversity.