INTERNATIONAL MONETARY SYSTEM

INTRODUCTION International Trade - Barter Bond issues to finance infrastructure projects in developing countries (19th century) Gold Standard ( ) Bretton Woods ( ) 1960s: Decline of U.S Economy 1971: Devaluation of Dollar Managed / Dirty float

America,Germany first to free capital flows Britain, 1979, Japan, 1980 (mostly) France, Italy removed restrictions in 1990 Currency Board in Hong Kong Dollarisation Creeping peg in Brazil The Euro The rise of China Is the dollar losing its importance?

Forex Markets  Players : Individuals, corporate banks, central banks and securities firms  95 % of trading between banks  More than 97 % or trading is speculative  Trading almost around the clock  Dealing room  Reuter’s screen  Society for Worldwide Interbank Financial Telecommunication, Sophisticated electronics technology.

GLOBAL FOREX TRADING Auckland Zurich Sydney Paris Tokyo London Singapore New York Frankfurt

Peak trading during European waking hours New York most active when Europe is open During afternoon, New York becomes more volatile Worst time to trade - after New York closes but Sydney has not opened

Currencies : ISO Codes CurrencyCodeCurrencyCode Aus$AUH Italian LiraITL Aus SchillingATSJapanese YenJPY Belgian FrancBEFNew Zealand DollarNZD SterlingGBPNorway KroneNOK Can $CADPortugese Escudo PTE Dan KrDKKSaudi RiyalSAR Deutsche MarkDEMSingapore $SGD Dutch GuilderNLGSpanish PesetaESP French FrancFRFSwedish KronerSEK Hongkong DollarHKDSwiss FrancCHF Irish PuntIEPUS DollarUSD Note: Reuters uses ISO Codes

COUNTRY’S CHOICE OF EXCHANGE RATE SYSTEM Openness : Relatively closed economies may find it difficult to correct external imbalances using domestic policies. They would prefer flexible exchange rates. On the other hand, open economies would prefer fixed exchange rates. Size : Small countries tend to prefer fixed exchange rates. Economic policy can be tailored to meet the needs of the economy as a whole. In a diversified large economy, flexible rates are preferable.

Export dependence on a few commodities Fixed exchange rate preferable. Otherwise disruptive effect on economy Capital A/C Convertibility Heavy inflows and outflows of capital create considerable difficulties in maintaining fixed exchange rate

Exchange Rate regimes (Q1, 1998) Fixed : 35.7% Managed floating : 29.7% Independently floating : 25.3% Others : 9.3%

A NEW FINANCIAL ARCHITECTURE Mexican Peso crisis Asian currency crisis Brazil/Russia Basic issues * weak financial systems * poor supervision and regulation * too much short term borrowing * false security of stable exchange rates * once crisis struck, contagion effects because of interconnected financial markets

Basic objectives of policy makers continuing national sovereignty globally regulated financial markets benefits of global capital markets Ideas being suggested reintroduction of capital controls creation of global central bank world currency global financial regulator remove IMF due to moral hazard

Practical suggestions improve disclosure norms put pressure for introducing bankruptcy laws Floating exchange rates can overshoot but allow country to retain independence as far as monetary policies are concerned. This freedom is however more limited than it looks prima facie. Fixed rates mean subservience to monetary policies of another country Emerging scenario- Two groups of countries Flexible exchange rates, relatively low level of integration into global capital markets Fixed exchange rates- Tightly integrated into global capital markets, foreign ownership, Euro or dollar zones

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