The Role of Central Banks in a Global Competition Environment

The topic of this chapter is of immediate interest. The recent crisis of financial markets in Southeast and East Asia and the spectacular devaluations of currencies involved once again raises the question of the role of the leading central banks in today’s world.1 Of course, the US$ and the euro are not challenged immediately. The third major currency, the yen, is weakened by domestic factors. The world financial centres are touched but not destabilised. Waves of financial transactions signal irritation and anxiety, but have left no deep distrust in the international financial system. At stake are the financial markets of the industrialised countries, the relationship between their international credits and debits, the efficacy of their monetary policies and the reputation of their governments. The crisis has exposed the vulnerability of emerging financial markets, the carelessness of borrowing and lending, and the propelling force of financial flows in creating speculative bubbles and exacerbating the crisis. The interrelations between waves of capital movements and structural distortions in the real economy have become obvious.