1. Lecture 6 The Global Monetary System
BUSN600
International Business Environment
Lecture 6 The Global Monetary System

2. Lecture 6 Main Concepts Exchange Rates The IMF and Exchange Rates
BUN600: International Business Environment
Lecture 6
Main Concepts
Exchange Rates
The IMF and Exchange Rates
Global Financial Crisis and the IMF
European Union and the Euro

3. Lecture 6 1 Exchange Rates Currency in a floating rate world
BUN600: International Business Environment
Lecture 6
1 Exchange Rates
Currency in a floating rate world
demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets

4. Lecture 6 1 Exchange Rates Role of central banks
BUN600: International Business Environment
Lecture 6
1 Exchange Rates
Role of central banks
reserve assets
intervening in the market
attitudes toward intervention
The Bank for International Settlements (BIS)
the central banks’ bank
coordinates central bank intervention

5. Lecture 6 1 Exchange Rates Hard currencies Soft currencies
BUN600: International Business Environment
Lecture 6
1 Exchange Rates
Hard currencies
U.S. dollar, Euro, British pound, Japanese yen, Australian dollar
Soft currencies
developing countries
Countries can control convertibility through
licenses
multiple exchange rate systems
advance import deposits
quantity controls

6. Lecture 6 2 The IMF andExchange Rates
BUN600: International Business Environment
Lecture 6
2 The IMF andExchange Rates
The IMF classifies currencies into three categories
Hard peg
Value is locked into something and does not change
Dollarization
Countries that use the dollar as an exchange arrangement with no separate legal tender are practicing dollarization of the currency.
Currency boards
A currency board is an organization generally separate from a country’s central bank. Its responsibility is to issue domestic currency that is typically anchored to a foreign currency. If it does not have deposits on hand in the foreign currency, it cannot issue more domestic currency.
Soft peg
Most countries following a soft peg arrangement use a conventional fixed-peg arrangement, whereby a country pegs its currency to another currency or basket of currencies and allows the exchange rate to vary plus or minus one percent from that value. It’s more similar to the original fixed exchange-rate system used by the IMF.
Chinese Yuan is an example
Floating
Floating regimes include floating systems that change according to market forces but may be subject to market intervention, or freely floating systems where intervention is rare.

7. Lecture 6 2 The IMF and Exchange Rates
BUN600: International Business Environment
Lecture 6
2 The IMF and Exchange Rates
The goals of the International Monetary Fund (IMF) are to
ensure stability in the international monetary system
promote international monetary cooperation and exchange-rate stability
facilitate the balanced growth of international trade
provide resources to help members in balance-of-payments difficulties or to assist with poverty reduction

8. Lecture 6 2 The IMF and Exchange Rates The Bretton Woods Agreement
BUN600: International Business Environment
Lecture 6
2 The IMF and Exchange Rates
The Bretton Woods Agreement
Under the Bretton Woods system of par values, the dollar was fixed at $35 per ounce of gold.
This became the benchmark against which all other currencies were valued.
Under the agreement, currencies could fluctuate within a one percent band of their par value.
The US dollar became the world benchmark for trading currencies and continues in that role today

9. Lecture 6 2 The IMF and Exchange Rates
BUN600: International Business Environment
Lecture 6
2 The IMF and Exchange Rates
Evolution to Floating Exchange Rates
In the early 1970s, the United States was in trouble. The country’s large balance-of-trade deficit made it difficult to maintain the fixed exchange rate system prompting then President Richard Nixon to abandon the Bretton Woods system in A new system, the Smithsonian Agreement was then established, followed by the Jamaica Agreement in 1976.
The Smithsonian Agreement
8% devaluation of the dollar
revaluation of other currencies
widening of exchange rate flexibility
The Jamaica Agreement
Under the Jamaica Agreement countries selected and maintained their own exchange rate arrangements
The IMF monitors the exchange rate policies of countries to see if they are acting openly and responsibly

10. Lecture 6 2 The IMF and Exchange Rates The Quota System
BUN600: International Business Environment
Lecture 6
2 The IMF and Exchange Rates
The Quota System
The IMF relies on a quota system to generate funds to lend to countries in need. Quotas, which are based on the relative size of a country within the global economy, are important because they influence the voting power of each country. The larger the quota, the higher the voting power.
The quota system was reformed in 2010 giving more quota shares to emerging markets. So, while the United States retained its top position, China now holds the number 3 spot, and the BRIC countries are among the largest shareholders in the Fund.
Assistance Programs
the IMF lends money to ease balance-of-payments difficulties
Special drawing rights (SDRs)
Special drawing rights are an international reserve asset given to each country to help increase its reserves. They are also the unit of account in which the IMF keeps its financial records.
Currencies making up the SDR basket are the U.S. dollar, the euro, the Japanese yen, and the British pound.

11. Lecture 6 3 Global Financial Crisis and the IMF
BUN600: International Business Environment
Lecture 6
3 Global Financial Crisis and the IMF
In 2008–2009 a major global and financial monetary crisis arose in the United States, where investors lost confidence in the value of ‘securitised’ home mortgages.
A key factor in the crisis was the widespread availability of ‘easy money’, leading to to the build-up of a vast global money supply and soaring price inflation for housing, oil, and food.
Many of the loans were ‘securitised’—bundled into investment assets and sold in financial markets worldwide; investors realised that many of the loans were high risk and unlikely to be repaid.
As the overheated US mortgage market cooled, the value of homes and securitised mortgages crashed, and the US financial system fell into crisis.

12. Lecture 6 3 Global Financial Crisis and the IMF
BUN600: International Business Environment
Lecture 6
3 Global Financial Crisis and the IMF
In 2008–2009 a major global and financial monetary crisis arose in the United States, where investors lost confidence in the value of ‘securitised’ home mortgages.
A key factor in the crisis was the widespread availability of ‘easy money’, leading to to the build-up of a vast global money supply and soaring price inflation for housing, oil, and food.
Many of the loans were ‘securitised’—bundled into investment assets and sold in financial markets worldwide; investors realised that many of the loans were high risk and unlikely to be repaid.
As the overheated US mortgage market cooled, the value of homes and securitised mortgages crashed, and the US financial system fell into crisis.

13. Lecture 6 3 Global Financial Crisis and the IMF
BUN600: International Business Environment
Lecture 6
3 Global Financial Crisis and the IMF
The global crisis in raised concerns over global liquidity
prompted the G20 to inject huge amounts of cash into the IMF
Greece’s financial crisis required assistance from the IMF and the EU
the IMF required Greece to adopt very unpopular austerity measures

14. Lecture 6 4 European Union and the Euro
BUN600: International Business Environment
Lecture 6
4 European Union and the Euro
The EU countries agreed to political and monetary union with the Treaty of Maastricht in As part of this agreement the countries decided to replace individual currencies with a single currency, the euro.
The Growth and Stability Pact provides the criteria that must be met to be part of the EMU. It includes measures of deficits, inflation, debt, interest rates, and exchange rate stability.
The new currency required companies to update their systems, but should also provide greater price transparency, and eliminate foreign exchange costs and risks.
During the global financial crisis, investors fled to dollars as a safe-haven currency and only returned to euros when they were willing to incur more risk.
Currently, the financial crisis in Greece is threatening the future of the euro.
Moreover, instability in Spain, Portugal, and Italy could also be problematic.