the bretton woods system
DESCRIPTION
The Bretton Woods System. Create a set of rules that would maintain fixed exchange rates in the face of short-term fluctuations; Guarantee that changes in exchange rates would occur only in the face of long-term, persistent deficits or surpluses in the balance of payments; - PowerPoint PPT PresentationTRANSCRIPT
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The Bretton Woods System
• Create a set of rules that would maintain fixed exchange rates in the face of short-term fluctuations;
• Guarantee that changes in exchange rates would occur only in the face of long-term, persistent deficits or surpluses in the balance of payments;
• Ensure that when such changes did occur, they would not spark a series of competitive devaluations.
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The International Monetary Fund (IMF)
The IMF was intended to play two major roles in the Bretton Woods System:
• the Fund should discourage aggressive exchange rate behavior by members and help them manage their balance of payments efficiently;
• the Fund was given resources to lend international reserves to countries with balance of payments difficulties.
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The Quota System
The IMF is financed by its members. Upon joining the IMF, a nation has to subscribe to a Quota, which is based on its relative economic significance and the level of its international business activities. The size of the member’s quota determines the country’s voting power and borrowing rights.
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The Quota System
• Voting Power– 250 “basic votes” plus one vote for
each SDR100,000 of quota.• Borrowing Rights
– Unconditional Borrowing Rights– Conditional Borrowing Rights
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IMF Credit Facilities
• Stand-By Arrangements (SBA)• Extended Fund Facility (EFF)• Supplemental Reserve Facility (SRF)• Contingent Credit Lines (CCL)• Compensatory Financing Facility (CFF)• Poverty Reduction and Growth Facility
(PRGF)
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Functions of the IMF
The Bretton Woods System was officially abandoned in 1973. With the collapse of the system, the IMF’s functions changed to
• Policy Cooperation;• Share Expertise;• Financial Assistance; and• Help the World’s Poorest Countries
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Structural Adjustment Programs
• Cut Social Spending;• Shrink Government;• Increase Interest Rates;• Eliminate Tariffs;• Eliminate Regulations on Foreign Ownership
of Resources and Businesses;• Cut Subsidies for Basic Goods; and• Re-orient Economies from Subsistence to
Exports
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The Special Drawing Right (SDR)
The Special Drawing Right (SDR) is an international reserve asset created by the IMF to supplement existing reserves. It is valued on the basis of a basket of five currencies and can be used in a wide variety of transactions and operations among official holders.
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SDR Valuation
Currency
Currency Amount (Rule O-1)
Exchange Rate as of Sep 20, 04
U.S. Dollar Equivalent
Euro 0.4260
1.213200 0.516823
Yen 21.0000 0.009104 0.191257
Pound 0.0984 1.783000 0.175447
U.S. $ 0.5770 1.000000 0.577000
$ Value of SDR1 1.460527
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