Global Business Final (second half)

IMS Main Functions

• Promote international exchange of goods, services, and factors of production

• Conventions, organizations, institutions

• Agreements on settling payments and adjusting imbalances

IMS Exchange Rate Systems

• Fixed, floating, or in between (dependent on government intervention)

• Need for reserve assets for foreign exchange intervention

IMS 3 Main Characteristics

• Adjustment - how countries correct external imbalances

• Liquidity - availability of reserves to intervene in markets

• Confidence - faith nations have in IMS states

IMS - The Gold Standard (1880-1914)

• Fixed exchange rate system - each nation agreed to maintain some domestic price of gold

• Gold as the reserve asset

• Limited monetary policy flexibility

• Collapse due to WWI and Great Depression

IMS - The Bretton Woods System (1944-1971)

• New monetary system monitored by IMF

• US agreed to fix gold at $35 per ounce, other nations fixed currency to USD

• Dollar as reserve asset and intervention currency

• 1971 - US ends gold convertibility (collapse of system)

IMS - Post-Bretton Woods (1971-Present)

• New system

• Increased flexibility of exchange rates

• Managed Floating System

IMF - Foundation

• 1944 (Bretton Woods Conference)

• HQ in Washington D.C.

• About 2,400 staff (primarily economists)

IMF - Governance

• Board of governors - top decision-making body, one governor for each member country (meets annually)

• Executive board - daily operations, 24 members

• Managing director - responsible for overall management, chair of the executive board

IMF - Membership

• 190 countries (each country is a shareholder)

• Quotas determine: financial contribution, voting power, and loan eligibility

• Size of country’s quota is based on size of its economy

IMF - Special Drawing Rights

• IMF’s international reserve asset (created 1969)

• Created to supplement existing official reserves of member countries

• View of supporting expansion of world trade and financial development

IMF - Shareholders

US (largest), Japan, Germany, UK, and France

IMF - Responsible for

• Promoting international monetary cooperation

• Facilitating the expansion and balanced growth of international trade

• Promoting exchange stability

• Providing resources to members

IMF Main Functions - Surveillance

• Monitors each member country’s economic and financial developments

• Holds policy dialogues with members to assess its economic conditions

• Reviews global and regional developments

• Publishes assessment through: World Economic Outlook and Global Financial Stability Report

IMF Main Functions - Financial Assistance

• Lends to members facing balance and payment problems

• Loan usually provided under an Arrangement (Letter of Intent)

• Most IMF loans - primarily financed by its members through quota payments

IMF Main Functions - Technical Assistance

• Help member countries in strengthening their capacity to design and implement effective policies in: fiscal policy, monetary policy, statistics, and financial law

• Training courses and seminars to members

The Euro

Goal - to create economic and monetary harmonization —> created the Economic and Monetary Union (EMU) to limit fluctuations in exchange rates

The Euro - Timeline

• 1969: EMU as main goal

• 1978: creation of European Monetary System (EMS)

• 1996: Stability and Growth Pact

• 1999: Launch of the euro

• 2002: Introduction of the euro

The Euro - Advantages

• Reduction of transaction costs

• Stability and growth at macro level

• Inflation and employment stability

• Competitiveness in global markets