Constructing an Enhanced Global Financial Safety Net: IMF as a Global Central Bank

The recent crisis has brought to light a number of entrenched vulnerabilities in the global financial system, and particularly in those of emerging economies. Despite strong fundamentals, emerging economies continue to stockpile excess reserves as self-insurance against disruptions to FX liquidity flows. This has resulted in capital flowing uphill and global imbalances, which were significant factors driving the financial crisis. The global nature of the crisis clearly indicates that there are serious missing links in the prevailing global financial architecture that have resulted in lingering financial instability. A Global Financial Safety Net(GFSN) within the institutional context of the IMF that acts as a de facto global central bank will address one of these links, allowing the global flow of capital to promote financial stability by curbing imbalances through shoring up confidence in emerging economies. If this missing link goes unattended, however, we will continue to suffer from recurrent financial crises, with large real economic consequences. Deep reforms along the lines of establishing a global central bank are essential to safeguard the stability of an increasingly financially integrated world.