Chapter Two Outline Evolution of the International Monetary System

Slides:



Advertisements
Similar presentations
World Payments System After World War II
Advertisements

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 10 Exchange Rates and Exchange Rate Systems.
Chapter 10 Exchange Rates and Exchange Rate Systems.
Global Business Today 7e
Monetary System This is a test.
International Monetary Systems
1 Multinational Financial Management Alan Shapiro 7 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton.
Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton.
CHAPTER 3 THE INTERNATIONAL MONETARY SYSTEM. CHAPTER OVERVIEW I. ALTERNATIVE EXCHANGE RATE SYSTEMS II.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYTEM.
The International Monetary System
International Business 9e
The International Monetary System
Unit 18 The International Monetary System (IMS). I. Features of IMS.
Page 1-1 #1. Introduction: International Financial Markets 1. History of International Financial System 2. Exchange Rates since 1973 Reading: International.
2. The International Monetary System Start by looking at a typical domestic monetary system.
The International Monetary System International Finance Dr. A. DeMaskey.
International Monetary Arrangements in Theory and Practice
Chapter Two Outline Evolution of the International Monetary System
Chapter Two Outline Evolution of the International Monetary System
International Finance
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 2-0 INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fourth Edition.
International Monetary System
International Financial Management Vicentiu Covrig 1 International Monetary System (chapter 2)
Economics 282 University of Alberta
International Monetary System
Chapter 08 The International Monetary System and Financial Forces McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 10 Understanding Foreign Exchange.
Outline Evolution of the International Monetary System
The pros, the cons and a little background on the creation of the euro
Exchange Rate Regimes. Fixed Exchange Rates and the Adjustment of the Real Exchange Rate In the medium run, the economy reaches the same real exchange.
International Money and Finance. L ECTURE O UTLINE  THEORY OF INTERNATIONAL FINANCE  Foreign Exchange Rates  HISTORY OF INTERNATIONAL MONETARY AND.
European Union and Economic and Monetary Union
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fifth Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Understanding the International Monetary System McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights.
Topics Evolution of the International Monetary System
International Financial Management Exchange rate systems and policies  evolution of international monetary system  Balance of payment accounts.
International Finance FINA 5331 Lecture 5 History of Monetary Institutions Read: Chapters 2 & 3 Aaron Smallwood Ph.D.
International Finance
Fixed and Floating Exchange Rates
Exchange-Rate Systems and Currency Crises © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part,
Distinguished Lecture on Economics in Government Exchange rate Regimes: is the Bipolar View Correct? Stanley Fischer Ahmad Bash P13-18.
chapter The International Monetary System McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 10.
1 International Finance Chapter 19 The International Monetary System Under Fixed Exchange rates.
The International Monetary System The structure within which foreign exchange rates are determined, international trade and capital flows are accomodated,
Bimetallism: Before 1875 A “double standard” in the sense that both gold and silver were used as money. Some countries were on the gold standard, some.
International Monetary System
Lecture 21 International Monetary System Exchange Rate Systems Floating Rate System vs Fixed Exchange Rate Systems Brief History The Eurocurrency Market.
Presentation on Dollar Based Gold Standard By Group-09.
The International Monetary System: Order or Disorder? 19.
1 International Macroeconomics Chapter 8 International Monetary System Fixed vs. Floating.
International Monetary System
© 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved PowerPoint® Presentation Prepared By Charles Schell International Monetary System Chapter 2.
Chapter 19 The International Financial System. © 2013 Pearson Education, Inc. All rights reserved.19-2 Intervention in the Foreign Exchange Market A central.
Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy: Fixed Exchange Rates Prof Mike Kennedy.
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fifth Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
Chapter 2 International Monetary System Management 3460 Institutions and Practices in International Finance Fall 2003 Greg Flanagan.
18-1 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics by Jackson and McIver Slides prepared by Muni Perumal Chapter 18 The international.
Chapter two The International Monetary System Chapter Objective:  This chapter serves to introduce the student to the institutional framework within which:
Copyright © 2012 by the McGraw-Hill Companies, Inc. All rights reserved. The International Monetary System Chapter Two.
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fifth Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
International Economics By Robert J. Carbaugh 7th Edition
International Monetary System
International Monetary System
International Monetary System
INTERNATIONAL FINANCIAL MANAGEMENT Fifth Edition EUN / RESNICK
Chapter 2 The International Monetary System
The International Monetary System
Chapter 2 The International Monetary System
Presentation transcript:

2 The International Monetary System Chapter Objective: This chapter serves to introduce the student to the institutional framework within which: International payments are made. The movement of capital is accommodated. Exchange rates are determined. 2 Chapter Two The International Monetary System 2-0

Chapter Two Outline Evolution of the International Monetary System Current Exchange Rate Arrangements European Monetary System Euro and the European Monetary Union The Mexican Peso Crisis The Asian Currency Crisis The Argentine Peso Crisis Fixed versus Flexible Exchange Rate Regimes 2-1

Evolution of the International Monetary System Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973-Present 2-2

Bimetallism: Before 1875 A “double standard” in the sense that both gold and silver were used as money. Some countries were on the gold standard, some on the silver standard, some on both. Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. 2-3

Gresham’s Law Gresham’s Law implied that it would be the least valuable metal that would tend to circulate. Suppose that you were a citizen of Germany during the period when there was a 20 German mark coin made of gold and a 5 German mark coin made of silver. If Gold suddenly and unexpectedly became much more valuable than silver, which coins would you spend if you wanted to buy a 20-mark item and which would you keep? 2-4

Classical Gold Standard: 1875-1914 During this period in most major countries: Gold alone was assured of unrestricted coinage There was two-way convertibility between gold and national currencies at a stable ratio. Gold could be freely exported or imported. The exchange rate between two country’s currencies would be determined by their relative gold contents. 2-5

Classical Gold Standard: 1875-1914 For example, if the dollar is pegged to gold at U.S. $30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: $30 = 1 ounce of gold = £6 $30 = £6 $5 = £1 2-6

Classical Gold Standard: 1875-1914 Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment. Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism. 2-7

Price-Specie-Flow Mechanism Suppose Great Britain exported more to France than France imported from Great Britain. This cannot persist under a gold standard. Net export of goods from Great Britain to France will be accompanied by a net flow of gold from France to Great Britain. This flow of gold will lead to a lower price level in France and, at the same time, a higher price level in Britain. The resultant change in relative price levels will slow exports from Great Britain and encourage exports from France. 2-8

Classical Gold Standard: 1875-1914 There are shortcomings: The supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves. Even if the world returned to a gold standard, any national government could abandon the standard. 2-9

Interwar Period: 1915-1944 Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market. Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”. The result for international trade and investment was profoundly detrimental. 2-10

Bretton Woods System: 1945-1972 Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. The purpose was to design a postwar international monetary system. The goal was exchange rate stability without the gold standard. The result was the creation of the IMF and the World Bank. 2-11

Bretton Woods System: 1945-1972 Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. Each country was responsible for maintaining its exchange rate within ±1% of the adopted par value by buying or selling foreign reserves as necessary. The Bretton Woods system was a dollar-based gold exchange standard. 2-12

Bretton Woods System: 1945-1972 German mark British pound French franc Par Value Par Value Par Value U.S. dollar Pegged at $35/oz. Gold 2-13

The Flexible Exchange Rate Regime: 1973-Present. 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. 2-14

Current Exchange Rate Arrangements Free Float The largest number of countries, about 48, allow market forces to determine their currency’s 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 currency. For example, Ecuador, Panama, and El Salvador have dollarized. Montenegro and San Marino use the euro. 2-15

European Monetary System European countries maintain exchange rates among their currencies within narrow bands, and jointly float against outside currencies. Objectives: To establish a zone of monetary stability in Europe. To coordinate exchange rate policies vis-à-vis non-European currencies. To pave the way for the European Monetary Union. 2-16

What Is the Euro? The euro is the single currency of the European Monetary Union which was adopted by 11 Member States on 1 January 1999. These original member states were: Belgium, Germany, Spain, France, Ireland, Italy, Luxemburg, Finland, Austria, Portugal and the Netherlands. 2-17

What are the Different Denominations of the Euro Notes and Coins ? There are 7 euro notes and 8 euro coins. €500, €200, €100, €50, €20, €10, and €5. The coins are: 2 euro, 1 euro, 50 euro cent, 20 euro cent, 10, euro cent, 5 euro cent, 2 euro cent, and 1 euro cent. The euro itself is divided into 100 cents, just like the U.S. dollar. 2-18

How Did the Euro Affect Contracts Denominated in National Currency? All insurance and other legal contracts continued in force with the substitution of amounts denominated in national currencies with their equivalents in euro. Once the changeover was completed by July 1, 2002, the legal-tender status of national currencies (e.g. German mark, Italian lira) was cancelled, leaving the euro as the sole legal tender in the euro zone. 2-19

The Long-Term Impact of the Euro As the euro proves successful, it will advance the political integration of Europe in a major way, eventually making a “United States of Europe” feasible. It is likely that the U.S. dollar will lose its place as the dominant world currency. The euro and the U.S. dollar will be the two major currencies. 2-20

Benefits of Monetary Union 2-21

Costs of Monetary Union The main cost of monetary union is the loss of national monetary and exchange rate policy independence. 2-22

Financial Crises Banking crises Debt crises Currency or Balance-of-Payments crises

Currency Crises since 1990 The EMS crisis (1992, 93) The Mexico Peso crisis (1994) The East Asian crises (1997-8) The Russian crisis (1998) The Argentine Peso Crisis (2001) And more The Global Financial Crises (2008)

The Mexican Peso Crisis On 20 December, 1994, the Mexican government announced a plan to devalue the peso against the dollar by 14 percent. This decision changed currency trader’s expectations about the future value of the peso. They stampeded for the exits. In their rush to get out the peso fell by as much as 40 percent. 2-25

The Mexican Peso Crisis The Mexican Peso crisis is unique in that it represents the first serious international financial crisis touched off by cross-border flight of portfolio capital. 2-26

The Mexican Peso Crisis Two lessons emerge: It is essential to have a multinational safety net in place to safeguard the world financial system from such crises. An influx of foreign capital can lead to an overvaluation in the first place. 2-27

The Asian Currency Crisis The Asian currency crisis turned out to be far more serious than the Mexican peso crisis in terms of the extent of the contagion and the severity of the resultant economic and social costs. Many firms with foreign currency bonds were forced into bankruptcy. The region experienced a deep, widespread recession. 2-28

The Argentinean Peso Crisis In 1991 the Argentine government passed a convertibility law that linked the peso to the U.S. dollar at parity. The initial economic effects were positive: Argentina’s chronic inflation was curtailed Foreign investment poured in As the U.S. dollar appreciated on the world market the Argentine peso became stronger as well. 2-29

The Argentinean Peso Crisis The strong peso hurt exports from Argentina and caused a protracted economic downturn that led to the abandonment of peso–dollar parity in January 2002. The unemployment rate rose above 20 percent The inflation rate reached a monthly rate of 20 percent 2-30

The Argentinean Peso Crisis There are at least three factors that are related to the collapse of the currency board arrangement and the ensuing economic crisis: Lack of fiscal discipline Labor market inflexibility Contagion from the financial crises in Brazil and Russia 2-31

Causes of Currency Crisis In theory, a currency’s value mirrors the fundamental strength of its underlying economy, relative to other economies. In the long run. In the short run, currency trader’s expectations play a much more important role. In today’s environment, traders and lenders, using the most modern communications, act by fight-or-flight instincts. For example, if they expect others are about to sell Brazilian reals for U.S. dollars, they want to “get to the exits first”. Thus, fears of depreciation become self-fulfilling prophecies. 2-32

Fixed versus Flexible Exchange Rate Regimes Arguments in favor of flexible exchange rates: Easier external adjustments. National policy autonomy. Arguments against flexible exchange rates: Exchange rate uncertainty may hamper international trade. No safeguards to prevent crises. 2-33

Fixed versus Flexible Exchange Rate Regimes Suppose the exchange rate is $1.40/€. Then, demand for euro increases sharply. Give some examples for this. As a result, demand exceeds supply at the initial exchange rate. The U.S. experiences trade deficits. “Balance of Payments deficits” would be a better term. 2-34

Fixed versus Flexible Exchange Rate Regimes Demand (D) Supply (S) Dollar price per € (exchange rate) $1.40 QS QD Trade deficit Q of € 2-35

Flexible Exchange Rate Regimes Under a flexible exchange rate regime, the dollar will simply depreciate to $1.60/€, the price at which supply equals demand and the trade deficit disappears. 2-36

Fixed versus Flexible Exchange Rate Regimes Supply (S) Dollar price per € (exchange rate) $1.60 Dollar depreciates (flexible regime) Demand (D) $1.40 Demand (D*) QD = QS Q of € 2-37

Fixed versus Flexible Exchange Rate Regimes Instead, suppose the exchange rate is “fixed” at $1.40/€, and thus the imbalance between supply and demand cannot be eliminated by a price change. The government would have to shift the demand curve from D to D* In this example this corresponds to contractionary monetary and fiscal policies. 2-38

Fixed versus Flexible Exchange Rate Regimes Supply (S) Contractionary policies Dollar price per € (exchange rate) (fixed regime) Demand (D) $1.40 Demand (D*) QD* = QS Q of € 2-39

End Chapter Two 2-40