Asymmetry Balance Of Payments Adjustment

Since the establishment of the Bretton Woods System with the U.S. dollar as theglobal reserve currency, the asymmetry in the balance of payments adjustmentbetween reserve currency country and non-reserve currency countries has become thecore issue of the international monetary system. This Article hereunder introduces theIS-LM-BP extended model, provides a comprehensive examination of the asymmetryof reserve currency country’s balance of payments adjustment, describes four typicalcases of the asymmetry and reinstates the transition of the international monetarysystem originated from the Bretton Woods System, wherein further divides the saidtransition into four stages in the light of the development of asymmetry, and exploresthe milestone events that leads to the development of asymmetry in every stage, theimpacts on the reserve currency country and non-reserve currency countriesrespectively, the efforts the international community made to resolve the asymmetryfrom the three dimensions of “Reserve Currency Country”,“Non-reserve CurrencyCountry” and “the Important Topics of International Monetary System”.The rationale of this Article is that, when a single sovereign currency becomes thestandard currency of the international monetary system, the global demand forinternational reserve currency is the sum of the total balance of payments deficits ofthe reserve currency country. By virtue of this, the reserve currency country couldfinance its international payments deficit through printing money, and pass on the costof adjustment to the non-reserve currency countries, which is the core reason of theasymmetry of balance of payments. In this context, the majority of non-reservecurrency countries could only passively bear the adverse impacts which are inflictedby the reserve currency country’s policies. Given the limited capacity of financing and“currency mismatch”, non-reserve currency countries are prone to the balance ofpayments crisis.This article points that, asymmetry is the root cause of global economic imbalanceand also the essential reason for the frequent occurrence of the balance of paymentscrisis in developing countries. In the short term, we should proactively constrain thereserve currency country’s monetary policy through international policy coordination so as to impose the responsibility of adjustment and necessary assistance on itespecially when the balance of payments crisis occurs to developing countries. In thelong term, we should establish a diversified international monetary competitionmechanism, which is the right direction of reform of the international monetarysystem. In recent years, the currency swap lines as the measures taken by the centralbanks of various countries to deal with the international financial crisis would havegreat significance for such reform.For developing countries, as in the weak position of balance of paymentsadjustment, have to bear too much adjustment cost when they confront externalshocks. The key to maintaining the long-term stable growth for developing countries,from the outside, is to establish a just international monetary system, to solve the“international lender of last resort” issue; from the inside, is to improve the ability tomobilize domestic savings, relying on “its own money” to solve problems. AlthoughChina, as a non-reserve currency country, successfully resisted the impacts of manyfinancial crisis, paid huge cost, which are extremely inefficient allocation of financialresources and serious distortions in the economic structure. As far as China’seconomic development is concerned, the top two priorities are: from the inside, topromote the transformation of economic development mode, from the outside, topromote the internationalization of the CNY.