Monetary Nationalism and International Economic Instability

The paper describes the international transmission of boom-and-bust cycles to small periphery economies as the outcome of excessive liquidity supply in large center economies based on the credit cycle theories of Hayek, Mises and Minsky. We show how too expansionary monetary policies can cause overinvestment cycles and distortions in the economic structure on both a national and an international level. Feedback effects of crises in periphery on center countries trigger new rounds of monetary expansion in center countries, which bring about new international distortions. Crisis and contagion in globalized goods and financial markets indicate the limits of purely national monetary policies in countries which provide the asymmetric world monetary system with international currencies. This makes the case for a monetary policy in large countries that takes responsibility for its long-term effects on goods and financial markets in both the home and the foreign countries.