ABSTRACT
The international financial system can be seen as a set of devices for correcting any eventual malfunctions of the world economy, particularly those rooted in the monetary side. The rationale for international monetary agencies is to ensure that automatic and other built-in mechanisms operating within the financial system will respond adequately to phases of strain. This chapter analyzes the stimulus-response pattern of the international financial system in order to shed light on the adequacy of present international monetary arrangements to cope with widespread economic disturbances like the external debt crisis and recession currently plaguing the world economy. The overwhelming presence of overindebtedness and depression should be seen as a manifestation of business cycle phenomena. The chapter shows that the external debt crisis is a result of fundamental changes in the nature of the international monetary mechanism, mainly brought about by the emergence of world financial intermediation and rapid integration of major capital markets in the late 1960s and early 1970s.
