The issue of "external imbalances" among the world's major trading nations has been a topic of discussion for a generation. A 1988 Working Paper of the International Monetary Fund (IMF) highlighted "external imbalances" among the United States, Germany and Japan as the primary policy challenge of the global economy. This sounds familiar enough except for the composition of some of the countries involved. So why is it that the world is still grappling with the same problem more than two decades down the road?

One of several possible answers is the difficulty in finding an international monetary system (IMS) that allows sufficient autonomy to individual countries while ensuring harmony in an increasingly interconnected global economy.

At the core of the IMS are individual exchange regimes, which are commitments by countries to value their currencies in a certain way relative to other currencies. These commitments - by the way economies are interconnected - entail giving up independence on some aspects of a country's macroeconomic policies. For example, a country with its currency fixed to another currency will lose monetary policy independence, with the degree depending on how freely capital can flow in and out of the country, that is, convertibility of the capital account. Thus, adopting a certain exchange rate regime is also a commitment on how a country intends to manage its macroeconomic policies.