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International
Monetary
System
•Free float
•Managed float
•Target zone arrangement
•Fixed rate system
•Hybrid system
International Monetary System
All countries like to have economic stability & prefer a stable
exchange rate, however fixing exchange rate often leads to
currency crises if the monetary policy is inconsistent with it
This is also called clean float as the exchange rates are free flowing
without any manipulation
International Monetary System
Managed float
Intervention by Government’s in the foreign change market in
order to reduce economic uncertainty associated with free/ clean
float
For this system to work, all member nations must accept the
groups joint inflation rate as its own.
Short term changes in its stock are limited by high production cost,
making it expensive to manipulate
The value of gold relative to other goods does not change much
over long period of time, that helps in maintaining monetary
discipline & ensures long run price stability
Under this system, only US & Britain were allowed to hold gold
reserves while other could hold both gold, dollars &/ or pound
reserves
The IMF had agenda to foster global growth and economic stability
International Monetary System
Bretton woods – The fine print
USD became the key currency & each Government pledged to
maintain a fixed, or pegged exchange rate vis-à-vis the dollar or
gold
1 ounce of gold = $ 35
1 ounce of gold = 140 mark (German)
so 4 mark = $ 1
Exchange rates were allowed to fluctuate by 1% above or below
initial base price.
The Bretton wood system was fixed rate, only in name, out of 21
major industrialized countries Only the US & Japan held to their
par value during 1946-71. Out of 21, 12 devalued their currencies
more than 30% against the dollar
The death blow for the system came from President Nixon, who
was alarmed at high inflation rate & he devalued the dollar to deal
with the emerging trade deficit
International Monetary System
Post Bretton woods
Thank You