2. chapter The International Monetary System McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 10

3. 10 - 3 Chapter 10: The International Monetary System INTRODUCTION The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates. When the foreign exchange market determines the relative value of a currency, a floating system exists. Countries that adopt a fixed exchange rate system fix their currencies against each other.

4. 10 - 4 Chapter 10: The International Monetary System THE GOLD STANDARD The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value. Mechanics of the Gold Standard Strength of the Gold Standard The Period between the Wars, 1918-1939

5. 10 - 5 Chapter 10: The International Monetary System THE BRETTON WOODS SYSTEM In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system. The goal was to build an enduring economic order that would facilitate postwar economic growth. The agreement established two multinational institutions: The International Monetary Fund (IMF) to maintain order in the international monetary system The World Bank to promote general economic development

6. 10 - 6 Chapter 10: The International Monetary System THE COLLAPSE OF THE FIXED EXCHANGE RATE SYSTEM U.S. macroeconomic policy decisions from 1965 to 1968 led to the collapse of the exchange rate system established in Bretton Woods.

7. 10 - 7 Chapter 10: The International Monetary System THE FLOATING EXCHANGE RATE REGIME The floating exchange rate regime that followed the collapse of Bretton Woods was formalized in January 1976 in Jamaica. The Jamaica Agreement Exchange Rates Since 1973

8. 10 - 8 Chapter 10: The International Monetary System FIXED VERSUS FLOATING EXCHANGE RATES Disappointment with floating rates in recent years has led to renewed debate about the merits of a fixed exchange rate system. The Case for Floating Exchange Rates The Case for Fixed Exchange Rates Who is Right?

9. 10 - 9 Chapter 10: The International Monetary System EXCHANGE RATE REGIMES IN PRACTICE 19% of IMF members follow a free float policy 26% of IMF members follow a managed float system 22% of IMF members have no legal tender of their own The remaining countries use less flexible systems such as pegged arrangements, or adjustable pegs

10. 10 - 10 Chapter 10: The International Monetary System Pegged Exchange Rates Currency Boards

11. 10 - 11 Chapter 10: The International Monetary System CRISIS MANAGEMENT BY THE IMF Many of the original reasons for the IMF's existence have disappeared The IMF has redefined its mission, and now focuses on lending money to countries experiencing financial crises

12. 10 - 12 Chapter 10: The International Monetary System Financial Crisis in the Post-Bretton Woods Era Mexican Currency Crisis of 1995 The Asian Crisis Evaluating the IMF’s Policy Prescriptions

13. 10 - 13 Chapter 10: The International Monetary System IMPLICATIONS FOR MANAGERS Because exchange rates are difficult to predict, they present significant challenges for managers. Currency Management Business Strategy Corporate - Government Relations