Economics of International Finance Econ. 315. Chapter 6: The International Monetary System: Past, Present and Future. I. Overview International Monetary System:
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Economics of International FinanceEcon. 315
The International Monetary System:
Past, Present and Future
Refers to rules, customs, instruments, facilities and organizations for affecting international payments. It can be classified according to:
1- The exchange rate system:
- Fixed with narrow band (Bretton Woods)
- Fixed with wide band
- Adjustable peg
- A crawling peg
- A managed floating
- A freely floating
2- International reserves:
- Gold standard (only gold)
- Pure fiduciary (paper currency only)
- Gold& exchangestandard (a combination of the two)
- Fixed exchange rate without gold (e.g., using $ instead as reserves)
- Adjustable peg ( or managed float) with gold and foreign exchange, or foreign exchange only.
II. The Gold Standard & the Interwar Experience
A- The Gold Standard Period (1880-1914)
B. The Adjustment Mechanism Under the Gold Standard:
The automatic price-specie-mechanism (PSM) , explained by David Hume as follows:
- For the system to operate, the nations are not supposed to sterilize (neutralize) the effect of a BOP deficit (by expanding the credit D) or surplus (by restricting credit D) on the nations money supply. Rules of the game indicates that the deficit nation should reinforce the adjustment process by restricting credit, and the surplus country to further expand credit.
- Taussigein the 1920s found that the adjustment process worked much too quickly and smoothly with little, if any, gold transfers. Why? BOP disequilibria are adjusted by capital flows not gold shipments. A deficit nation will have lower money supply higher interest rates capital inflows to cover the deficit.
- A supporting condition for the system was due to the special conditions in the world because of great economic growth and stability in almost all the nations during this era.
C- The Interwar Experience
The gold standard ended by the outbreak of the WWI. During 1914-1924, exchange rates fluctuated widely and there was a desire to return to stability.
The United Kingdom:
Why the system collapsed?
III. The Bretton Woods System
The Gold standard 1947-1971:
A. Establishment of the IMF to:
B. The Bretton woods was a gold-exchange standard. The following were the rules of the system
Borrowing from the IMF
Operation of the Bretton woods system.