This article begins with the hypothesis that large economic fluctuations--the marked changes in the unemployment rate that characterize market economies--are a consequence of problems of adjustment to disturbances, especially adjustments of wages and prices. The article argues that because different prices (including prices of labor and capital) are determined in different ways, shocks lead to marked changes in relative prices, and those disturbances in relative prices greatly exacerbate economic fluctuations. The author looks closely at the price-setting process, providing further insights into why prices exhibit rigidities and why different prices may adjust at different rates. He then explores the consequences of asymmetric price responses.

Recent turmoil in international financial markets has raised a set of fundamental questions for the global community: Is the set of international financial arrangements, established after the Great Depression and World War II and modified after the abandonment of the gold standard in 1973, up to the challenges of the twenty-first century? Are minor modifications such as slight changes in the governance of the international financial institutions, increased transparency, or surveillance! all that is required to adapt these institutions to the needs of modern economies, or are more fundamental changes necessary? Today, although much has been proposed, discussed, and argued, no consensus on desirable changes has yet been reached. In the meantime, what can countries, especially the poor, the small, and the less developed, do to protect themselves from the seeming ravages of storms brought on by international financial instability?