Moreover, those countries most at risk from capital flight are not necessarily those with the highest reserves. Scaling countries’ reserves by measures of their external short-term indebtedness suggests a highly-uneven pattern (Chart 16), with a number of countries holding less than would be needed to meet a year’s worth of capital outflows. Third, this pattern is broadly mirrored when moving from measures of self-insurance, such as reserves, to official financing measures. Chart 17 scales IMF resources by external assets. Since the 1980s, this measure has roughly halved from 3% to 1.5%. And fourth, even once we augment multilateral financing with measures of regional official financing, total official resources relative to external assets are still shy of their levels in 1980. Taken in combination, this paints a picture of an international monetary system whose underlying topology has fundamentally changed shape and scale – much larger, much more connected. But it is also a system whose architecture may have failed to keep pace with those changes. Therein lies a key potential fault-line. Strengthening the system This naturally begs the question – what might be done to close this fault-line, to improve the resilience of the international monetary system? One response would be to retreat from financial globalisation by re-imposing barriers to capital movement, unravelling the tightlywoven knitting of the global financial web. We have seen this movie before. It opened in the aftermath of the Great Depression and ended in disaster.
They make that expectation by considering the past trends and what is happening right now. If they expect that the prices on average would rise, then, they can be said to be harboring high inflation expectations. A central bank can gauge this situation by conducting periodical inflation expectation surveys. Second, a consumer price index, compiled to measure the changes in the cost of living of a given group of people, may show a continuous increase over a substantial period of time. It indicates an unstable situation in the macro economy leading to an upward movement in the general price level. The presence of either situation requires a central bank to go into action against fighting inflation. This means that, even if the consumer price index shows stability or a relatively low growth, the central bank cannot stop taking inflation fighting measures. What a central bank should do is to eradicate the cause rather than pampering with the symptoms. It is similar to a physician who does not take delight when he observes that the high fever of a patient has subsided. The physician would not stop his curative treatment, until the cause of that high fever is totally eliminated. There appears to be a general tendency for equating increases in the cost of living with inflation. An increase in the cost of living occurs when the basket of commodities consumed by a given group of people entails a higher cost. As mentioned earlier, this is measured by compiling a consumer price index.