International Chapter 11

International Monetary System

The institutional arrangements that countries adopt to govern exchange rates.

Floating Exchange Rate System

A system where the exchange rate is continuously adjusted based on the laws of supply and demand in the foreign exchange market.

Dirty-Float (Managed-Float) System

A system where a currency is nominally allowed to float freely, but the government intervenes (buys or sells currency) if it deviates too far from what is considered a fair value.

Fixed Exchange Rate System

A system in which the exchange rate for converting one currency into another is fixed by international agreement.

The Gold Standard

The historical practice of pegging currencies to gold and guaranteeing convertibility.

Gold Par Value

The specific amount of a currency needed to purchase one ounce of gold.

Balance-of-Trade Equilibrium

Reached when the income a nation's residents earn from exports equals the money paid for imports.

The Bretton Woods Agreement (1944)

The international conference that established the International Monetary Fund (IMF) and the World Bank to design a new monetary system after WWII.

Primary Function of the IMF

To maintain order in the international monetary system through a combination of discipline (fixed exchange rates) and flexibility (short-term loans).

Primary Function of the World Bank (IBRD)

Originally to help rebuild post-war Europe; currently focused on promoting economic development in poorer nations.

The Jamaica Agreement (1976)

The agreement that revised the IMF's Articles of Agreement to officially recognize floating exchange rates as acceptable.

Monetary Policy Autonomy

An argument for floating rates; it allows a government to manage its own money supply to meet domestic goals (like employment) without worrying about maintaining a fixed parity.

Pegged Exchange Rate

A currency value that is fixed relative to a reference currency (like the U.S. dollar).

Currency Board

A system where a country commits to converting domestic currency on demand into another currency at a fixed rate, backed 100% by foreign reserves.

Currency Crisis

Occurs when a speculative attack leads to a sharp depreciation of a currency or forces the government to exhaust reserves to defend it.

Banking Crisis

A loss of confidence in the banking system leading to a "run" on banks where depositors withdraw all their funds.

Foreign Debt Crisis

A situation in which a country cannot service its international debt obligations (private or public).

Moral Hazard

The tendency for people or governments to behave recklessly because they know they will be "bailed out" if things go wrong.

Discipline in the Gold Standard

The restriction that prevents governments from printing too much money because the money supply is limited by physical gold reserves.

Anchor Currency (Bretton Woods)

The U.S. Dollar, which was the only currency fixed to gold ($35/ounce), acting as the foundation for all other currencies

Austerity Measures

Policy requirements by the IMF in exchange for loans, often involving cutting government spending and raising interest rates.

Short-Term Exchange Risk Management

Using financial instruments like the forward market and swaps to lock in rates for future transactions.

Strategic Flexibility (Long-Term)

Dispersing production and factories to different parts of the world to reduce the impact of any single currency's fluctuation.

Main Criticism of Fixed Rates

They force a country to give up control of its domestic monetary policy to maintain the exchange rate link.

The Collapse of Bretton Woods

Caused by U.S. macroeconomic pressure (Vietnam War and Great Society spending), which led to inflation and a trade deficit, making the dollar's gold link unsustainable.