International finance The international monetary system

International finance Lecture outline  The notion and the functions of the IMS  Gold standard system  The gold bullion standard  The Bretton Woods system

International finance IMS definition  A set of rules, procedures, instruments and institutions which are necessary to settle international payments Source: A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2006.

International finance The reasons for the creation of IMS  The necessity of international economic cooperation  The efficiency of the international payment system  Facilitation of international trade  Facilitation of international capital flow

International finance IMS functions  Ensuring international money supply  Ensuring international liquidity  Ensuring a global payment equilibrium  Creating a framework for the national economic policy  Contributing to international economic stabilisation

International finance International money  Unit of account  Medium of exchange  Store of value

International finance International money L. Oręziak, Euro nowy pieniądz, PWN, Warszawa Private transactions Official transactionsFunction Price quotationReference currencyUnit of account Transaction currencyIntervention currency Medium of exchange Investment currencyReserve currencyStore of value

International finance International money  Criteria  Large share in global exports  Credibility concerning the value of the currency  A well developed financial market

International finance International money  Main international currencies  USD, EUR, JPY  Transaction function  USD 84%, EUR 39%, JPY 19%  Reference function  USD- 69 państw, EUR- 40 państw  Reserve currency  USD 63,9% EUR 26,5%, GBP 4,7% Source: BIS, IMF

International finance International liquidity  A stock of assets enabling settling international payments  An appropriate level and quality of reserves  Reserves- assets held by the monetary authority, which may serve to reinstate the external equilibrium

International finance International liquidity  Reserves types  Foreign currency  Gold  SDR (special drawing rights)

International finance Reserves structure (bln USD) Source: IMF

International finance Global payment equilibrium  Tools enabling balance of payments adjustments  Automatic mechanisms  Adjustment policy

International finance Global payment equilibrium  BP surplus  China 296 bln USD, Germany 131 bln USD, Japan 110 bln USD  BP deficit  USA, -380 bln USD, Spain -70 bln USD Source: IMF

International finance Framework for the national economic policy  External and internal equlibrium  IMF  Measures to reinstate the BP equilibrium

International finance Stabilisation of the international economy  ER volatility  Various ER regimes  The role of reserves

International finance Currency convertibility  The legaly established possibility to convert freely the national currency for any foreign currency and vice versa at a single ER

International finance Currency convertibility  Internal convertibility  External convertibility  Unlimited convertibility

International finance The gold standard   Creation of the world economy  the necessity to create an IMS  The main goal- maintaining the external equilibrium

International finance The gold standard Main rules:  Fixed ER at the level of the mutual gold parity of two currencies  The amount of money in circulation strictly depends on the stock of gold reserves  BP imbalances adjusted through gold flows

International finance The gold standard The mechanism:  BP deficit   outflow of gold reserves   decrease of money supply   decrease of national prices   increase of exports, decrease of imports   BP equilibrium reinstated

International finance The gold standard  Fast BP adjustments +  Low ER volatility +  Scarce set of measures enabling the reinstatement equilibrium -  The internal equilibrium subordinated to the external eqilbrium -  Deficit countries bear the burden of adjustments -

International finance The gold bullion standard   No convertibilty of money to gold  Gold served the purpose of equilbrium adjustments

International finance The gold bullion standard  Great depression 30-ties  Protectionism  Economic desintegration

International finance The Bretton Woods system   Endavour to reconcile the external and internal equilibrium  IMF and World Bank

International finance The Bretton Woods system Rules:  Fixed ER versus USD  Fixed price of gold in USD  Official foreign reserves- gold and USD

International finance The Bretton Woods system  IMF  The possibility to adjust ER  Member quotas  Loans

International finance The Bretton Woods system  Currency convertibility  Liberalisation of capital flow  Growing economic integration  Speculative capital flows

International finance The Bretton Woods system  The problem of the US external equilibrium  The necessity to hold large gold reserves  The credibility problem

International finance The Bretton Woods system  Fiscal expansion in the USA  inflation  terms of trade deterioration  BP deterioration  Expansionary monetary policy of the FED  Speculation on USD depreciation  A two-level gold market

International finance The breakdown of the Bretton Woods system  recession in the USA  the necessity to devalue USD  suspension of USD convertibilty to gold  Revaluation of the other currencies  The Smithonian agreement

International finance The breakdown of the Bretton Woods system  Intensive speculative attacks on USD  The necessity to close the currency market  Floating ER

International finance The Bretton Woods system- an assessment  Stabilisation throughout 20 years  International money supply ensured  ER stability ensured

International finance The Bretton Woods system- an assessment  Insufficient international liquidity  The internal equilibrium subordinated to the external eqilbrium  Changing economic environment

International finance After Bretton Woods  Floating ER- Kingston 1976  Expanded international liquidity  The foundations of the contemporary IMS

International finance Summing up  IMS functions  IMS evolution  The Bretton Woods system rules  The reasons for the breakdown of the Bretton Woods system

International finance References  P. Krugman, M.Obstfeld, International economics: theory and policy., Pearson, Addison Wesley, Boston 2009  E. Truman, The International Monetary System and Global Imbalances, IMF conference paper 2010  P. Clark, J. Polak, International liquidity and the role of SDR in the International Monetary System, IMF Working Paper, 2002  A. Kester, International reserves and foreign currency liquidity, IMF, 2001