International Business ch11

Floating exchange rate system

Where the foreign exchange market determines the relative value of a currency

• US dollar, European union euro, Japanese Yen, British Pound

Pegged Exchange rate system

When the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate

Managed-float or dirty-float system

when the value of a

currency is determined by market forces, but with central bank

intervention if it depreciates too rapidly against an important

Fixed exchange rate system

countries fix their currencies

against each other at a mutually agreed upon value.

Dollarization

A country abandons its own currency and adopts another (typically the U.S. dollar)

gold standard

pegging currencies to gold

and guaranteeing convertibility.

balance-of-trade equilibrium

When the income a country’s residents earn from its exports is equal to

the money its residents pay for imports.

Bretton Woods Agreement

A new international monetary system was designed in 19 44 in

Bretton Woods, New Hampshire.

International Monetary Fund (IMF)

to maintain order in the

international monetary system

The World Bank

To promote general economic development

The Role of the IMF

Discipline.

• A fixed exchange rate stops competitive devaluations and brings

stability to the world trade environment.

• It also imposes monetary discipline on countries, thereby curtailing

price inflation.

Flexibility.

• IMF is ready to lend foreign currencies to members to tide them over

during short periods of balance-of-payments deficits.

• A country could devalue its currency by more than 10 percent if its

balance of payments was in “fundamental disequilibrium.”

Monetary Policy Autonomy

Removal of obligation to maintain exchange rate parity restores

monetary control to a government.

• With a fixed system, a country's ability to expand or contract its money

supply is limited by the need to maintain exchange rate parity.