Studied by 0 people
Looks like no one added any tags here yet for you.
The international Monetary system
Institutional framework within which international payments are made, and movements of capital are accommodated.
Evolution of the International Monetary system
Bimetallism (<1875)
Classical Gold Standard (1875-1914)
Interwar period (1915-1944)
Bretton Woods system (1945-1972)
The Flexible Exchange Rate Regime (1973- present)
Free Float
Countries who allow market forces to determine their currencys value
Managed float
About 50 countries combine government intervention with market forces to set exchange rates
Currency board
A legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate
Crawling peg
like conventional peg, but adjusted in small amounts at a fixed rate of change or in response to changes in micro indicators.
Conventional peg
A countrys currency is fixed to another currency, a basket of currencies, or a commodity like gold. Central bank maintains fixed rate by intervening in the market, buying or selling its own currency to keep the exchange rate within the narrow band.
Stabilized arrangement
A spot market exchange rate that remains within a margin of 2% for 6 months or more and is not floating.
Goal for European Monetary Systems
Monetary stability, coordinate exchange rate policies against non-european currencies, pave the way for the European Monetary Union.
Longterm impact of the Euro
Reduction of transactions costs and exchange uncertainty
Creates conditions conducive to development of an integrated regional capital market.
Step towards political integration of Europe
Loss of national monetary and exchange rate policy is the main cost.
Arguments for Flexible rates
Easier external adjustments
National policy autonomy
Arguments against flexible rates
exchange rate uncertainty
No safeguard to prevent crises
Triffin Paradox
the idea the reserve currency country should run a balance of payment deficit, but this can decrease confidence in the reserve currency and lead to the downfall of the system
To partially alleviate the pressure on the dollar as the central reserve currency, the IMF created an artificial international reserve called
SDR (a basket currency comprising major individual currencies)
Smithsonian agreement
In an attempt to save the Bretton Woods system, 10 G10 countries agreed to devalue the US dollar against the gold and most major currencies.
3 essential functions of money
unit of accounting
Medium of exchange
Storage of value
Two main instruments of the European Monetary system
The European Currency Unit (ECU) - “basket” currency. Serves as the accounting unit of the EMS and plays an important role in the workings of the exchange rate mechanism.
The Exchange Rate Mechanism (ERM) - Based on the “parity grid” system, which is a system of par values among ERM currencies.
Why is the exchange rate mechanism of the EMS said to be like a “Snake”
A European version of a fixed exchange rate system that appeared as the Bretton Woods system declined. Name is derived from the way the EEC currencies moved closely together within the wider band allowed for other currencies.
Maastricht treaty 1991
states the European Union will irrevocably fix exchange rates among member countries and introduce a common european currency that will replace individual currencies
The 3 tasks of the eurosystem are
Define and implement the common monetary policy
Conduct foreign exchange operations
Manage the official foreign reserves of the Euro members states
the incompatible Trinity states
A country can only have 2 out of the 3 conditions:
A fixed exchange rate
Free international flows of capital
Independent monetary policy
Tobin Tax
Tax on the currency exchange of hot money for the purpose of discouraging cross-border financial speculation
what does a balance of payments defecit mean
There is an excess supply of the countrys currency in the foreign exchange market. Under fixed rate, the external value will depreciate to the level where there is no excess supply.
An ideal IMS should provide
liquidity
Adjustment
Confidence
