Global imbalances have become a major source of systemic risk to the global economy. They
can have adverse repercussions in the short and long term on both surplus and deficit
economies due to the potentially disruptive effect of a sudden adjustment. They can be
amplified by short term speculation that prevents the real exchange rate to perform its
adjusting role. The paper examines past and recent patterns of destabilizing short term
speculative flows that have led to financial fragility and real costs for a number of various
economies. Domestic policies aimed at preventing speculation and overvaluation such as non-
monetary anti-inflationary policies as well as temporary measures to constrain speculative
flows should be coupled with globally coordinated policies to reduce global imbalances.
Among the latter intermediate exchange rate regimes or regional cooperative schemes should
be favoured. An international monetary system should provide a code of conduct, multilateral
oversight and negotiations, and a multilateral body that could identify the size of the deviation
enforce the necessary measures to correct the imbalances.
