The Anatomy of Financial Crises and the Role of Monetary Policy

Crises come in a variety of forms. A focus on the incidence of financial crises underemphasizes the cross-border element in financial crises. How important is the exchange-rate regime in monetary policy strategies? Is the EMU experience a cautionary tale? The exchange-rate regime matters less than we think because financial globalization has conspired to effectively reduce the scope for an independent monetary policy. The EMU is unlikely to survive in its current form. Politicians seek coordinated solutions in a system that is built on policy cooperation. International coordination is only practical in emergency or crisis conditions. Cooperation is desirable only if common standards or objectives are combined with escape clauses to render them realistic. This is a goal worth pursuing. Exiting from post-GFC is a reminder that the focus on policy spillovers is misplaced. Business cycles are rarely synchronized and there cannot be a one-size fits all monetary policy.