Understanding the Understanding the International Monetary International Monetary

SystemSystem

Chapter 5Chapter 5

Current TrendsCurrent Trends

Post-WWIIPost-WWII Dollar’s valueDollar’s value Convertible currenciesConvertible currencies

Gold Standard HistoryGold Standard History

The Gold MarketThe Gold Market v. platinum v. diamondv. platinum v. diamond

Gold StandardGold Standard Currency per ounce of goldCurrency per ounce of gold

Return to gold standard?Return to gold standard? Why?Why? Why not?Why not?

Gold Standard HistoryGold Standard History

Bretton WoodsBretton Woods Established IMFEstablished IMF Established World BankEstablished World Bank Established gold exchange standardEstablished gold exchange standard Decided stable exchange rates betterDecided stable exchange rates better Dollar became central reserve assetDollar became central reserve asset

International Monetary FundInternational Monetary Fund

ObjectiveObjective Works with UNWorks with UN Greater Power?Greater Power?

Film surveillanceFilm surveillance Two methodsTwo methods

G-8 CountriesG-8 Countries Conditionality and Cooperation with Conditionality and Cooperation with

World BankWorld Bank

World BankWorld Bank

Multilateral development banksMultilateral development banks Roles of developing and developed Roles of developing and developed

countriescountries World BankWorld Bank

$16 billion in loans annually$16 billion in loans annually Hard loansHard loans

Encourage investorsEncourage investors

World BankWorld Bank

International Finance CorporationInternational Finance Corporation Investment bankerInvestment banker Favors joint venturesFavors joint ventures Create local capital marketsCreate local capital markets

International Development International Development AssociationAssociation Soft loansSoft loans

Why?Why?

World BankWorld Bank

Multilateral Investment GuaranteeMultilateral Investment Guarantee 152 countries 152 countries $30 billion in private investment in 70 $30 billion in private investment in 70

developing countriesdeveloping countries Capacity building and advisory servicesCapacity building and advisory services

International Center for Settlement of International Center for Settlement of Investment DisputesInvestment Disputes Advisory and research servicesAdvisory and research services

Problems with World BankProblems with World Bank

World BankWorld Bank

Other Multilateral BanksOther Multilateral Banks African Development BankAfrican Development Bank

DisorganizationDisorganization Lack of fundsLack of funds

Asian Development BankAsian Development Bank Lack of fundsLack of funds

European Bank for Reconstruction and European Bank for Reconstruction and DevelopmentDevelopment

Who does it help?Who does it help?

World BankWorld Bank

Other Multilateral BanksOther Multilateral Banks Inter-American Development BankInter-American Development Bank

U.S. and 45 other countriesU.S. and 45 other countries 1998- Lending is $10 billion1998- Lending is $10 billion

Bank for International Bank for International SettlementsSettlements

Location: SwitzerlandLocation: Switzerland Anonymous coverAnonymous cover Four functionsFour functions

Forum for international monetary Forum for international monetary cooperationcooperation

Center for researchCenter for research Banker for central banksBanker for central banks Agent for various financial arrangementsAgent for various financial arrangements

U.S. joined in 1994U.S. joined in 1994

Balance of PaymentsBalance of Payments

Deficits- U.S.Deficits- U.S. Could be due to inflationCould be due to inflation

Market measuresMarket measures Nonmarket measuresNonmarket measures

Balance of PaymentsBalance of Payments

Current AccountCurrent Account Goods/merchandiseGoods/merchandise ServicesServices Unilateral transfersUnilateral transfers

Capital AccountCapital Account Direct investmentDirect investment Portfolio investmentPortfolio investment Short-term capital flowsShort-term capital flows

Official Reserves AccountOfficial Reserves Account

Balance of PaymentsBalance of Payments

Temporary DisequilibriumTemporary Disequilibrium Monetary policiesMonetary policies Fiscal policiesFiscal policies

Fundamental DisequilibriumFundamental Disequilibrium

History of U.S. and Gold History of U.S. and Gold StandardStandard

U.S. Dollar became over-valuedU.S. Dollar became over-valued Why not de-value the currency?Why not de-value the currency?

Central banksCentral banks Gold Exchange StandardGold Exchange Standard

$35/oz. of gold$35/oz. of gold ResultsResults

1958-1971- U.S ran deficit1958-1971- U.S ran deficit Dichotomy of the situationDichotomy of the situation

History of U.S. and Gold History of U.S. and Gold StandardStandard

August 1971August 1971 December 1971 and February 1973December 1971 and February 1973

Fixed currency exchange ratesFixed currency exchange rates Floating currency exchange ratesFloating currency exchange rates

Types of Currency FloatsTypes of Currency Floats Free (clean)Free (clean) Managed (dirty)Managed (dirty)

History of U.S. and Gold History of U.S. and Gold StandardStandard

1981-851981-85 U.S. runs a deficitU.S. runs a deficit

Why?Why?

Sept. 1985Sept. 1985 Group of FiveGroup of Five

Today- Group of EightToday- Group of Eight Government reserves todayGovernment reserves today

Currency AreasCurrency Areas Currencies are floatingCurrencies are floating

SnakeSnake Mid-1970’sMid-1970’s EuropeEurope What was it?What was it?

Experience with FloatingExperience with Floating Hard to peg Hard to peg System today- has it held?System today- has it held?

Forecasting Float DirectionForecasting Float Direction

Purchasing Power ParityPurchasing Power Parity Big Mac IndexBig Mac Index Starbucks IndexStarbucks Index

Money Markets and Foreign Money Markets and Foreign ExchangesExchanges

Money MarketsMoney Markets Which market is the largest?Which market is the largest? Grew until 2001Grew until 2001

Why did it stop?Why did it stop? Asian currenciesAsian currencies Most traded currenciesMost traded currencies

SDRsSDRs

Special Drawing RightsSpecial Drawing Rights How is it calculated?How is it calculated? UsesUses

Remains stableRemains stable HoldersHolders SDRs as central reserve assetsSDRs as central reserve assets

Replace currencies and gold?Replace currencies and gold? ReasonsReasons

European Monetary SystemEuropean Monetary System

European Monetary UnionEuropean Monetary Union 19791979 European Monetary Cooperation FundEuropean Monetary Cooperation Fund 1991- Maastricht1991- Maastricht

European Central BankEuropean Central Bank European Currency UnitEuropean Currency Unit

Why did it work when SDR failed?Why did it work when SDR failed? EuroEuro

Transition to EuroTransition to Euro CirculationCirculation European Central BankEuropean Central Bank

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