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Introduction

The international monetary system refers to the institutional arrangements that govern exchange rates. Floating exchange rates occur when the foreign exchange market determines the relative value of a currency The worlds four major currencies dollar, euro, yen, and pound are all free to float against each other
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Introduction
Pegged exchange rates occur when the value of a currency is fixed relative to a reference currency Dirty float occurs when countries hold the value of their currency within a range of a reference currency Fixed exchange rate occurs when a set of currencies are fixed against each other at some mutually agreed upon exchange rate Pegged exchange rates, dirty floats and fixed exchange rates all require some degree of government intervention
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The Gold Standard

Roots in old mercantile trade Inconvenient to ship gold, changed to paperredeemable for gold Want to achieve balance-of-trade equilibrium

Japan

USA

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Balance of Trade Equilibrium

Decreased money supply = price decline.

Trade Surplus

As prices decline, exports increase and trade goes into equilibrium.

Gold

Increased money supply = price inflation.

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Between the Wars

Post WWI, war heavy expenditures affected the value of dollars against gold
US raised dollars to gold from $20.67 to $35 per ounce
- Dollar worth less?

Other countries followed suit and devalued their currencies

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Bretton Woods
In 1944, 44 countries met in New Hampshire Countries agreed to peg their currencies to US$ which was convertible to gold at $35/oz Agreed not to engage in competitive devaluations for trade purposes and defend their currencies Weak currencies could be devalued up to 10% w/o approval Created the IMF and World Bank The Bretton Woods system was a dollar-based gold exchange standard
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International Monetary Fund

The International Monetary Fund (IMF) Articles of Agreement were heavily influenced by the worldwide financial collapse, competitive devaluations, trade wars, high unemployment, hyperinflation in Germany and elsewhere, and general economic disintegration that occurred between the two world wars The aim of the IMF was to try to avoid a repetition of that chaos through a combination of discipline and flexibility
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International Monetary Fund

Discipline
- Maintaining a fixed exchange rate imposes monetary discipline, curtails inflation - Brake on competitive devaluations and stability to the world trade environment

Flexibility
- Lending facility:
Lend foreign currencies to countries having balance-ofpayments problems

- Adjustable parities:
Allow countries to devalue currencies more than 10% if balance of payments was in fundamental disequilibrium

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Role of the World Bank

The official name for the world bank is the International Bank for Reconstruction and Development Purpose: To fund Europes reconstruction and help 3rd world countries. Overshadowed by Marshall Plan, so it turns towards development
- Lending money raised through WB bond sales
Agriculture Education Population control Urban development

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Collapse of the Fixed Exchange System

The system of fixed exchange rates established at Bretton Woods worked well until the late 1960s
- The US dollar was the only currency that could be converted into gold - The US dollar served as the reference point for all other currencies - Any pressure to devalue the dollar would cause problems through out the world

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Collapse of the Fixed Exchange System

Factors that led to the collapse of the fixed exchange system include
- President Johnson financed both the Great Society and Vietnam by printing money - High inflation and high spending on imports - On August 8, 1971, President Nixon announces dollar no longer convertible into gold - Countries agreed to revalue their currencies against the dollar - On March 19, 1972, Japan and most of Europe floated their currencies - In 1973, Bretton Woods fails because the key currency (dollar) is under speculative attack
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Fixed Versus Floating Exchange Rates

Floating:
- Monetary policy autonomy
Restores control to government

Fixed:
Monetary discipline .Speculation Limits speculators Uncertainty Predictable rate movements Trade balance adjustments Argue no link between exchange rates and trade
Link between savings and investment

- Trade balance adjustments

Adjust currency to correct trade imbalances

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The Flexible Exchange Rate Regime: 1973Present.

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. Non-oil-exporting countries and less-developed countries were given greater access to IMF funds.

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Exchange Rate Regimes

Pegged Exchange Rates

- Peg own currency to a major currency ($) - Popular among smaller nations - Evidence of moderation of inflation

Currency Boards
- Country commits to converting domestic currency on demand into another currency at a fixed exchange rate - Country holds foreign currency reserves equal to 100% of domestic currency issued

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Current Exchange Rate Arrangements

2-15

Free Float
- The largest number of countries, about 48, allow market forces to determine their currencys 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 (through franc or mark).

No national currency
- Some countries do not bother printing their own, they just use the U.S. dollar. For example, Ecuador has recently dollarized.
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Crisis Management by the IMF

The IMFs activities have expanded because periodic financial crises have continued to hit many economies
- Currency crisis
When a speculative attack on a currencys exchange value results in a sharp depreciation of the currencys value or forces authorities to defend the currency

- Banking crisis
Loss of confidence in the banking system leading to a run on the banks

- Foreign debt crisis

When a country cannot service its foreign debt obligations

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Evaluating the IMF Policy Prescriptions

Inappropriate policies
- The IMFs one-size-fits-all approach to macroeconomic policy is inappropriate for many countries

Moral hazard
- People behave recklessly when they know they will be saved if things go wrong

Lack of Accountability
- The IMF has become too powerful for an institution that lacks any real mechanism for accountability

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What Is the Euro?

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The euro is the single currency of the European Monetary Union which was adopted by 11 Member States on 1 January 1999. These member states are: Belgium, Germany, Spain, France, Ireland, Italy, Luxemburg, Finland, Austria, Portugal and the Netherlands.

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EURO CONVERSION RATES

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1 Euro is Equal to:

40.3399 BEF 1.95583 DEM 166.386 ESP 6.55957 FRF .787564 IEP 1936.27 ITL 40.3399 LUF 2.20371 NLG 13.7603 ATS 200.482 PTE 5.94573 FIM
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Belgian franc German mark Spanish peseta French franc Irish punt Italian lira Luxembourg franc Dutch gilder Austrian schilling Portuguese escudo Finnish markka
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What is the subdivision of the euro?

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During the transitional period up to 31 December 2001, the national currencies of the member states (Lira, Deutsche Mark, Peseta, Franc. . . ) will be "non-decimal" subdivisions of the euro. The euro itself is divided into 100 cents.

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What is the official sign of the euro?

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The sign for the new single currency looks like an E with two clearly marked, horizontal parallel lines across it.

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It was inspired by the Greek letter epsilon, in reference to the cradle of European civilization and to the first letter of the
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What are the different denominations of the euro notes and coins ?
There will be 7 euro notes and 8 euro coins. The notes will be: 500, 200, 100, 50, 20, 10, and 5 euro. The coins will be: 2 euro, 1 euro, 50 euro cent, 20 euro cent, 10, euro cent, 5 euro cent, 2 euro cent, and 1 euro cent.

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How will the euro affect contracts denominated in national currency?

All insurance and other legal contracts will continue in force with the substitution of amounts denominated in national currencies with their equivalents in euro. Euro values will be calculated according to the fixed conversion rates with the national currency unit adopted on 1 January 1999. Generally, the conversion to the euro will take place on 1 January 2002, unless both parties to the contract agree to do so beforehand.

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