All the elements - reserves, exchange rates and capital flows - of the global monetary system need reforms. Capital flows, the third leg, call for capital account regulations in both developing and developed countries. In the former, regulations can be justified as a way to help authorities avoid exchange rate appreciation while reducing the need for costly and/or useless foreign exchange reserve accumulation. In the advanced economies, the effectiveness of monetary expansion may be enhanced if they reduce the leakages generated by short-term capital outflows. This would, in fact, imply a return to the basic principle under which the IMF was built: that it is in the best interests of all members to allow countries to pursue their own full employment macroeconomic policies, even if this required regulating capital flows.
