On 22 November 2019, Hélène Rey (London Business School) delivered the fourteenth Paolo Baffi Lecture, in which she describes the current international monetary system, its fragilities and possible future developments. Professor Rey begins by observing that the dollar is the hegemonic currency and this gives the United States a unique role as a world banker and insurer. She goes on to show that the international financial system is characterized by global financial cycles, heavily influenced by shocks originating in the 'core' of the system, in particular from US monetary policy. Global financial cycles are defined as the co-movements of gross capital flows, credit growth, risky asset prices and leverage across countries. These cycles affect all domestic financial systems, irrespective of the exchange rate regimes, and call for a more sophisticated macroprudential framework.
Moreover, Professor Rey argues that the current international monetary system may be facing a new Triffin dilemma. The equilibrium in which the dollar is the dominant international currency might become unstable over time, as the size of the United States keeps shrinking relative to the world economy, while the stock of overall dollar liabilities keeps growing. Currently there appears to be no credible alternative to the dollar but, with the rise of other economic centres, a transition to a multipolar currency regime is a possibility. The main challenge and first-order issue should be to think through the dynamics of a regime change. Finally, the emergence of private or public digital currencies could have a catalytic role, upset payment systems, and reshape global monetary and financial influences.