Money and finance on the periphery of the International dollar standard

✍ Scribed by Ronald I. McKinnon

• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 111 KB
• Volume: 7
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/ijfe.178

✦ Synopsis

In most developing countries, neither corporate nor government bonds are traded on open markets. Indeed, corporate bonds simply do not exist in many developing countries. Typically, the commercial banks are captive buyers of low yielding domestic government bonds by virtue of liquidity ratio requirements. Government deficits are financed almost entirely by loans from the central and commercial banks. (Fry, 1995, p. 236) The problem of excessively short-term finance in developing countries was long one of Maxwell Fry's principal concerns. Indeed, his 1997 book is provocatively entitled Emancipating the Banking System and Developing Markets for Government Debt. Together with developing institutions that would better allow capital markets to thrive, Fry focused on domestic monetary stabilization with financial liberalization as the key to more robust longer-term bond markets.

This paper does not approach Fry's ingenuity in econometrically testing the ideas it contains, but it is written in the spirit of his work on emerging-market economies. Why is monetary and financial management so much more difficult on the periphery of the industrial world than at the centre? In particular, why is the term to maturity of finance in emerging markets so short, with external liabilities all denominated in foreign exchange, largely dollars? This paper's focus, an overview on how the world dollar standard works, is a vehicle for throwing light on problems faced by central banks and regulatory authorities in Asia, Latin America, and elsewhere.