International monetary system
- a system that forms rules and standards for facilitating international trade among the
nations.
It helps in reallocating the capital and investment from one nation to another.
It is the global network of the government and financial institutions that determine the
exchange rate of different currencies for international trade. It is a governing body that
sets rules and regulations by which different nations exchange currencies with each
other.
With the growing complexity in the international trade and financial market, the
international monetary system is necessary to assign a standard value of the
international currencies. The rules and regulations set by the international monetary
system to regulate and control the exchange value of the currencies are agreed upon by
the respective governments of the nations. Thus, the government’s stand may affect the
decision making of the international monetary system. For example, change in the trade
policy of a government may affect the international trade of goods and services.
International monetary system motivates and encourages the nations to participate in
the international trade to improve their BOP and minimize the trade deficit. It has grown
over the years as a single architectural body with a vision to integrate the global
economy. Some of the important achievements of the international monetary system
over the years have been the establishment of World Bank and International Monetary
Fund in the year 1944.
Purpose Of The International Monetary System
The purpose of the international monetary system (IMS) is to facilitate international
economic exchange since most countries have national currencies that are not typically
accepted as legal payment beyond their borders. When the IMS is operating
mellifluously, international trade/investment can flourish; however, when the IMS
operates inefficiently or even completely fails (as in the Great Depression or the recent
Credit Crisis), international trade/investment is throttled.
The essential element of the IMS is to facilitate the exchange of goods, services, and
capital among countries. The IMS seeks to contribute to stable and high global growth
while currently fostering price and financial stability. The IMS regulates the balance of
payments, which is an accounting device that records all international transactions
between a country and the rest of the world for a given period, and comprises four
elements: 1) exchange arrangements/rates, 2) international payments and transfers
relating to current international transactions, 3) international capital movements, and 4)
international reserves.
Currency Regimes
Currency regimes (aka exchange rate regimes) determines how a nation values its
currency in comparison to other nations. The exchange rate regime is how a nation
manages its currency in the foreign exchange market and is closely related to the
nation’s monetary policy. There are two primary exchange rate regimes: flexible
(floating) exchange and the fixed exchange. In real world practice, however, exchange
rate regimes run the gamut from currency boards and traditional pegs to crawling pegs,
target zones, and floats with varying degrees of intervention.
Fixed exchange rates
are “fixed” by the government and not determined by market forces, and only small
deviations from this fixed value is possible. With fixed exchange rates, foreign central
banks buy and sell their currencies at a fixed price. A fixed exchange rate is generally
seen as being transparent and a simple anchor for monetary policy. An example of this
system was used under the Gold Standard where each country committed itself to
convert freely its currency into gold at a fixed price. The value of each foreign currency
was defined in terms of gold and the exchange rate was fixed according to the gold
value of currencies that had to be exchanged.
Flexible Exchange Rates
- are determined by forces of demand and supply of the foreign exchange market and
the value of currency can float freely in tandem with the change in demand and supply
of foreign exchange. With flexible exchange rates, the nation’s central bank allows the
exchange rate to be commensurate with the supply and demand of the foreign currency.
Flexible exchange rates have the advantage that they allow a country to pursue an
independent monetary policy, rather than have its own monetary policy set by an anchor
currency country.
References:
https://www.economicsdiscussion.net/articles/international-monetary-system/4256
https://empireresume.com/what-is-the-international-monetary-system/
