the international monetary system the structure within which foreign exchange rates are determined,...
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The InternationalThe InternationalMonetary SystemMonetary System
The structure within which foreign exchange rates are determined, international trade and capital flows are accomodated, and adjustments to the balance of payments made
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- It also includes all the - It also includes all the instruments, institutions and instruments, institutions and agreements that link together agreements that link together
the world’s currency and the world’s currency and money marketsmoney markets
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The present system is The present system is characterised by a mix of characterised by a mix of
fixed, floating and managed fixed, floating and managed exchange rate policiesexchange rate policies
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Currencies of most nations are based on agreements in force between their government and the International Monetary Fund ( IMF )
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DEVELOPMENT OF THE DEVELOPMENT OF THE INTERNATIONAL MONETARYINTERNATIONAL MONETARYSYSTEMSYSTEMMonetary System before 1945
No international central bankThe Gold Standard
Development of the International Monetary Fund (IMF)
Monetary System 1945 - 1973Dropping the Gold StandardCurrency Float
Currency Arrangements 1973 - Present
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The Gold StandardThe Gold Standard1876-19131876-1913
The “ rules of the game” were clear and simple. Each country set the rate which its currency( paper or coin) could be converted to a weight of gold
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ExampleExample
In USA, the dollar is convertible to gold at a rate of $ 20.67 per ounce of gold
In the UK the British pound was pegged to
£ 4.2474 per ounce of gold
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As long as both currencies were freely convertible into gold, we can work out the dollar/pound exchange rate.
What is it?
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$ 4.86656 to the pound
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The value of each individual The value of each individual currency in terms of gold and currency in terms of gold and therefore its own fixed parity therefore its own fixed parity
between currencies remainedbetween currencies remainedstable.stable.
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LIMITATIONSLIMITATIONS
Important to maintain adequate reserves of gold to back currency value
The rate at which a country could expand its money supply
Additional gold to be acquired by official authorities
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Earlier Linkage SystemsEarlier Linkage Systems
Gold StandardGold Exchange Standard
( the system generally followed by the largest industrial countries at present)
European Monetary System (EMS) and its “special currency”, the European currency unit, the ECU
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THE INTER-WAR YEARS AND THE INTER-WAR YEARS AND WORLD WAR II 1914-1944WORLD WAR II 1914-1944
During World War I and the early 1920’s, currencies were allowed to fluctuate over fairly wide ranges in terms of both gold and one another.
Unfortunately, such flexible exchange rates did not work in an equilibrim manner.
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Instead of 2 international reserve Instead of 2 international reserve assets, gold and sterling, there are assets, gold and sterling, there are now several.now several.
USA and France had become importantUSA and France had become importanttrade partnerstrade partners
Volume of trade did not grow in the Volume of trade did not grow in the 1920’s in proportion world’s GNP and 1920’s in proportion world’s GNP and declined to a very low leveldeclined to a very low level
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Foreign Exchange Markets, exchange rates and other institutional mechanisms were effectively suspended during the war
By the end of World War II, sterling dominance of international trade has gone and the era of the Gold Standard has passed
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The Bretton-Woods The Bretton-Woods AgreementAgreement
Establishment of a US dollar based International Monetary System and provided for 2 new institutions
- The IMF
- The World Bank
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The Bretton-Woods systemThe Bretton-Woods system
Each fund member would establish with the approval of the IMF, a par value for its currency, and would undertake to maintain exchange rates for its currency within 1 % of the declared par value
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The Bretton-Woods systemThe Bretton-Woods system
Members would change their par value only after having secured IMF approval.
This approval would be granted only if there were evidence that the country was suffering from a fundamental disequilibrium in its balance of payments.
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The Bretton-Woods systemThe Bretton-Woods system
Each IMF member country would pay into the IMF pool a quota, ¼ being in gold with the remainder in its own currency. The size of the quota was a function of each member’s size in the world economy.
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The International Monetary The International Monetary FundFund
Key institution in the new monetary system and it remains so to-day
Established to render temporary assistance to member countries trying to defend their currencies against cyclical, seasonal or random occurences
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The International Monetary The International Monetary FundFund
It also assist countries having structural trade problems if they take adequate steps to correct their problems
To carry out its tasks, the IMF was originally funded by each member subscribing to a quota based on post World War II patterns
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The International Bank for The International Bank for Reconstruction and DevelopmentReconstruction and Development
Initially aided in post-war reconstruction, but since has supported general economic development
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SPECIAL DRAWING RIGHTSSPECIAL DRAWING RIGHTS
The SDR is an international reserve asset created by the IMF in 1969 to supplement existing foreign exchange reserves.
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SPECIAL DRAWING RIGHTSSPECIAL DRAWING RIGHTS
It serves as a unit of account for the IMF and other international and regional organisations.
It is also the base against which some countries peg the rate of exchange for their currencies.
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SPECIAL DRAWING RIGHTSSPECIAL DRAWING RIGHTS
The SDR is a composite index of 5 key participant currencies.
Use the IMF website to find the current weights and valuation of the SDR
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CONTEMPORARY CONTEMPORARY CURRENCY REGIMESCURRENCY REGIMES
International monetary system currencies
Currency boardsDollarizationFixed versus flexible exchange
rates
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What are the likely attributes
of the “ideal currency”?
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Some currency terminologySome currency terminology
Exchange ratePar value of a currencyDevaluation of a currencyWeakness/depreciation of a
currencySoft/weak currency
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Classification of currency Classification of currency arrangementsarrangements
Pegged to another currencyPegged to a composite basket
of currenciesIndependently floatingManaged floating
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Currency Board SystemCurrency Board System
No Central BankThe Board issues notes and coins that
are convertible on demand and at a fixed rate into a foreign reserve currency
The reserves of the board are high-quality, interest- bearing securities denominated in the reserve currency
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Currency Board SystemCurrency Board System
Reserves = 100% or slightly more of notes and coins in circulation
Has no discretionary monetary policy. Market forces alone determine money supply
Example: Singapore, Hong Kong