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Financial Globalization and Exchange Rates

Philip R. Lane and Gian Maria Milesi-Ferretti

Abstract

The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rate adjustment in a world economy that was characterized by widespread restrictions on international capital mobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for the international monetary system. In particular, large gross cross-holdings of foreign assets and liabilities means that the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional trade balance channel. Accordingly, this paper empirically explores some of the inter-connections between financial globalization and exchange rate adjustment and discusses the policy implications.
Keywords: Financial integration, capital flows, external assets and liabilities
JEL Classification Codes: F31, F32


Last updated 28 August 2014 by IIIS (Email).