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International Monetary System ppt by imtiaz Ali
- 3. OBJECTIVE What is InternationalMonetary System Evolution of the International Monetary System Current Exchange Rate Arrangements European Monetary System European Monetary Union Fixed versus Flexible Exchange Rate Regimes
- 4. International Monetary System ✔International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally there allocation of capital between nation states. International monetary system refers to the system prevailing in world foreign exchange markets through which international trade and capital movement are financed and exchange rates are determined.
- 5. Features that IMSshould possess Efficient and unrestricted flow of international trade and investment. Stability in foreign exchange aspects. Promoting Balance of Payments adjustments to prevent disruptions associated. Providing countries with sufficient liquidity to finance temporary balance of payments deficits. Should at least try avoid adding further uncertainty. Allowing member countries to pursue independent monetary and fiscal policies.
- 6. Requirements of goodinternational monetary system Adjustment a good system must be able to adjust imbalances in balance of payments quickly and at a relatively lower cost; Stability and Confidence: the system must be able to keep exchange rates relatively fixed and people must have confidence in the stability of the system;
- 7. Liquidity: the systemmust be able to provide enough reserve assets for a nation to correct its balance of payments deficits without making the nation run into deflation or inflation.
- 8. *STAGES IN INTERNATIONALMONETARY SYSTEM 1. Bimetallism: Before 1875 2. Classical Gold Standard: 1875-1914 3. Interwar Period: 1915-1944 4. Bretton Woods System: 1945-1972 5. The Flexible Exchange Rate Regime: 1973- Present
- 9. Bimetallism: Before 1875A "double standard" in the sense that both gold and silver were used as money. Some countries were on the gold standard, some on the silver standard, some on both. Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Gresham's Law implied that it would be the least valuable metal that would tend to
- 10. Gresham's Law Gresham's lawis an economic principle that states: "if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation." It is commonly stated as: ""Bad" (abundant) money drives out "Good" (scarce) money"
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- 12. Gold Standard During thisperiod in most major countries: •Gold alone was assured of unrestricted coinage There was two-way convertibility between gold and national currencies at a stable ratio. Gold could be freely exported or imported. The exchange rate between two country's currencies would be determined by their relative gold contents.
- 13. Rules ofthe system Each country defined the value of its currency in terms of gold. Exchange rate between any two currencies was calculated as X currency per ounce of gold/ Y currency per ounce of gold. These exchange rates were set by arbitrage depending on the transportation costs of gold. Central banks are restricted in not being able to issue more currency than gold reserves.
- 14. Classical Gold Standard: Exchange rate determination For example, if the dollar is pegged to gold at U.S.$30- 1 ounce of gold, and the British pound is pegged to gold at £6-1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents $30 =£6 $5= £1
- 15. Classical Gold Standard: Highlystable exchange rates under the classical gold standard provided an environment that was favorable to international trade and investment Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie- flow mechanism.
- 16. Price-Specie-FlowMechanism Suppose Great Britainexported more to France than France imported from Great Britain. •Net export of goods from Great Britain to France will be accompanied by a net flow of gold from France to Great Britain. •This flow of gold will lead to a lower price level in France and, at the same time, a higher price level in Britain. The resultant change in relative price levels will slow exports from Great Britain and encourage exports from France.
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- 18. Interwar Period: 1915-1944 Exchangerates fluctuated as countries widely used "predatory" depreciations of their currencies as a means of gaining advantage in the world export market. Attempts were made to restore the gold standard, but participants lacked the political will to "follow the rules of the game "The world economy characterized by tremendous instability and eventually economic breakdown, what is known as the Great Depression (1930-39)
- 19. Interwar Period: 1915-1944 InternationalEconomic Disintegration - Many countries suffered during the Great Depression. Major economic harm was done by restrictions on international trade and payments. - These beggar-thy-neighbor policies provoked foreign retaliation and led to the disintegration of the world economy. - All countries' situations could have been bettered through international cooperation
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- 21. Bretton Woods System:1945-1972 Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard.
- 22. Resulted in; The resultwas the creation of the IMF and the World Bank 1. IMF: maintain order in monetary system 2. World Bank: promote general economic
- 23. Features of BrettonWoods System ✔ Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. Each country was responsible for maintaining its exchange rate fixed within ±1% of the adopted par value by buying or selling foreign reserves as necessary. ✔The Bretton Woods system was a dollar-based gold exchange standard.
- 24. The Demise ofthe Bretton Woods System • In the early post-war period, the U.S. government had to provide dollar reserves to all countries who wanted to intervene in their currency markets. The increasing supply of dollars worldwide, made available through programs like the Marshall Plan, meant that the credibility of the gold backing of the dollar was in question. U.S. dollars held abroad grew rapidly and this represented a claim on U.S. gold stocks and cast some doubt on the U.S.'s ability to convert dollars into gold upon request.
- 25. tHE FLEXIBLE EXCHANGERATE REGIME: 1973-PRESENT
- 26. The Flexible ExchangeRate Regime ✔Flexible exchange rates were declared acceptable to the IMF members. • Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities. ✔Gold was abandoned as an international reserve asset. ✔The currencies are no longer backed by gold
- 27. Current Exchange RateArrangements Free Float •The largest number of countries, about 48, allow market forces to determine their currency's value. Managed Float •About 25 countries combine government intervention with market forces to set exchange rates. Pegged to another currency •Such as the U.S. dollar or euro etc... No national currency •Some countries do not bother printing their own, they just use the U dollar. For example, Ecuador, Panama, and have dollarized.
- 28. The European MonetarySystem (EMS) EMS was created in 1979 to stabilize exchange rates between European countries and foster economic integration. It included a system of fixed exchange rates and the European Currency Unit (ECU). The EMS laid the groundwork for the Economic and Monetary Union (EMU), which was established with the Maastricht Treaty in 1992. The EMU led to the creation of the euro and the European Central Bank (ECB), with participating countries adopting a common monetary policy and the euro as their currency.
- 29. Emerging market currency Emergingmarket currencies are those from countries with developing economies, often characterized by higher volatility compared to currencies from developed nations. Examples include the Brazilian real, Indian rupee, South African rand, and Turkish lira. These currencies can be influenced by various factors such as geopolitical events, economic data, and global market sentiment.