Dr Marek Porzycki Chair for Economic Policy

 basic concepts  exchange rate regimes  evolution of the international currency system  Special Drawing Rights (SDR)  currency unions

 Currency - synonym of money - system of monetary units in use in a country or an area  Foreign exchange - foreign currency (in: foreign exchange reserves) - market for trading currencies (in: FX market)  Exchange rate – value (price) of one currency expressed in another currency - spot and forward exchange rate - buying and selling rate, mid-market rate

 Convertibility - full convertibility – no restrictions on currency trade on the foreign exchange market. E.g. USD, EUR, PLN - partial convertibility – control on cross-border capital flows, some restriction on currency conversion. E.g. CNY, INR - no convertibility – currency conversion is generally banned, currency is not traded on the FX market. E.g. Eastern Bloc currencies before 1989, Cuban „national” peso, North Korean won.  exchange rate movements - appreciation vs. depreciation - devaluation vs. revaluation

 Fixed exchange rate (currency peg) - currency board – currency reserves in the anchor currency need to cover all local currency cash and reserves held with central bank (all M0 monetary aggregate). New money in local currency can be issued only in return for anchor currency. - otherwise the currency peg needs to be maintained by interventions of the central bank on the foreign exchange market (more vulnerable)  a further step: dollarization/euroization  Flexible exchange rate – exchange rate results from supply and demand on the foreign exchange market  hybrid regimes: managed float, pegged float (within a certain band, e.g. ERM II), crawling peg and other, exchange rate floor or ceiling

 Constraints on monetary policy resulting from a fixed exchange rate. Impossibility of maintaining three features simultaneously: - fixed exchange rate, - free flow of capital - independent monetary policy  Examples: - China (tightly managed float similar to a currency peg, capital controls, some degree of independence in monetary policy) - Bulgaria (currency peg, free flow of capital under EU law, no independent monetary policy) - Poland (floating exchange rate, free flow of capital under EU law, independent monetary policy)

 ‘gold standard’ until WWI – effectively a system of fixed exchange rates with gold as a measure of reference  Bretton Woods system (after WWII) – fixed exchange rates to USD, USD fixed to gold at $35 = 1 oz.  IMF and World Bank  Crisis of the Bretton Woods system and abolishment of the relation of USD to gold in 1971  Since 1970s – a system of flexible exchange rates, with several mutual or regional arrangements

 an accounting unit created by the IMF in 1969 to facilitate management of foreign exchange reserves and international settlements  represents a claim on currency held as reserves by IMF member states  value based on a basket of 4 currencies (EUR, USD, JPY, GBP)  allocated by the IMF Board of Governors to IMF Member States (current total allocation at ca. 204 bn SDRs, average rate 1 SDR = 1,50 USD)  used as reserve asset (relatively minor importance) and unit of account  a 2009 proposal by Zhou Xiaochuan, chairman of the People’s Bank of China, to increase the role of SDR as global reserve currency

 use of the same currency in more than one country  usually result from a formal arrangement (treaty) but may also result from de-facto usage of a currency of another country (see also  dollarization/euroization)  need for a common monetary policy (see  optimum currency area), loss of monetary sovereignty

 historical: Latin Monetary Union ( /1927), Scandinavian Monetary Union ( )  existing: - West African and Central African CFA Franc zones (CFA Franc, pegged to EUR) - East Carribean Currency Union (East Caribbean dollar, pegged to USD) - Singapore-Brunei currency interchangeability agreement - Common Monetary Area, South Africa (South African rand) - Economic and Monetary Union (euro area) [see  further courses]  planned: - initiative of the Gulf Cooperation Council (Khaleeji)

Additional (facultative):  F. Mishkin, The Economics of Money, Banking, and Financial Markets, Pearson, 10 th ed. 2013, p  Ch. Proctor, Mann on the Legal Aspect of Money, 7th ed. 2012: Chapter 33, Other Forms of Monetary Organization, pp  Zhou Xiaochuan, Reform the International Monetary System, March 2009, / _.html / _.html