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Understanding the International Monetary System

This chapter delves into the evolution of the International Monetary System post-World War II, focusing on the value of the U.S. dollar, the transition from the gold standard, and the establishment of key institutions like the IMF and World Bank. It examines the roles of convertible currencies, challenges of fixed and floating exchange rates, and the impact of various multilateral banks. Furthermore, it explores current trends, such as the use of Special Drawing Rights (SDRs) and the European Monetary Union, addressing the complexities of global finance today.

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Understanding the International Monetary System

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Presentation Transcript

  1. Understanding the International Monetary System Chapter 5

  2. Current Trends • Post-WWII • Dollar’s value • Convertible currencies

  3. Gold Standard History • The Gold Market • v. platinum v. diamond • Gold Standard • Currency per ounce of gold • Return to gold standard? • Why? • Why not?

  4. Gold Standard History • Bretton Woods • Established IMF • Established World Bank • Established gold exchange standard • Decided stable exchange rates better • Dollar became central reserve asset

  5. International Monetary Fund • Objective • Works with UN • Greater Power? • Film surveillance • Two methods • G-8 Countries • Conditionality and Cooperation with World Bank

  6. World Bank • Multilateral development banks • Roles of developing and developed countries • World Bank • $16 billion in loans annually • Hard loans • Encourage investors

  7. World Bank • International Finance Corporation • Investment banker • Favors joint ventures • Create local capital markets • International Development Association • Soft loans • Why?

  8. World Bank • Multilateral Investment Guarantee • 152 countries • $30 billion in private investment in 70 developing countries • Capacity building and advisory services • International Center for Settlement of Investment Disputes • Advisory and research services • Problems with World Bank

  9. World Bank • Other Multilateral Banks • African Development Bank • Disorganization • Lack of funds • Asian Development Bank • Lack of funds • European Bank for Reconstruction and Development • Who does it help?

  10. World Bank • Other Multilateral Banks • Inter-American Development Bank • U.S. and 45 other countries • 1998- Lending is $10 billion

  11. Bank for International Settlements • Location: Switzerland • Anonymous cover • Four functions • Forum for international monetary cooperation • Center for research • Banker for central banks • Agent for various financial arrangements • U.S. joined in 1994

  12. Balance of Payments • Deficits- U.S. • Could be due to inflation • Market measures • Nonmarket measures

  13. Balance of Payments • Current Account • Goods/merchandise • Services • Unilateral transfers • Capital Account • Direct investment • Portfolio investment • Short-term capital flows • Official Reserves Account

  14. Balance of Payments • Temporary Disequilibrium • Monetary policies • Fiscal policies • Fundamental Disequilibrium

  15. History of U.S. and Gold Standard • U.S. Dollar became over-valued • Why not de-value the currency? • Central banks • Gold Exchange Standard • $35/oz. of gold • Results • 1958-1971- U.S ran deficit • Dichotomy of the situation

  16. History of U.S. and Gold Standard • August 1971 • December 1971 and February 1973 • Fixed currency exchange rates • Floating currency exchange rates • Types of Currency Floats • Free (clean) • Managed (dirty)

  17. History of U.S. and Gold Standard • 1981-85 • U.S. runs a deficit • Why? • Sept. 1985 • Group of Five • Today- Group of Eight • Government reserves today

  18. Currency Areas • Currencies are floating • Snake • Mid-1970’s • Europe • What was it? • Experience with Floating • Hard to peg • System today- has it held?

  19. Forecasting Float Direction • Purchasing Power Parity • Big Mac Index • Starbucks Index

  20. Money Markets and Foreign Exchanges • Money Markets • Which market is the largest? • Grew until 2001 • Why did it stop? • Asian currencies • Most traded currencies

  21. SDRs • Special Drawing Rights • How is it calculated? • Uses • Remains stable • Holders • SDRs as central reserve assets • Replace currencies and gold? • Reasons

  22. European Monetary System • European Monetary Union • 1979 • European Monetary Cooperation Fund • 1991- Maastricht • European Central Bank • European Currency Unit • Why did it work when SDR failed? • Euro • Transition to Euro • Circulation • European Central Bank • Powers

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