Transcript Chapter 5: Understanding the International Monetary System

Understanding the International
Monetary System
Chapter 5
Current Trends
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Post-WWII
Dollar’s value
Convertible currencies
Gold Standard History
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The Gold Market
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Gold Standard
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v. platinum v. diamond
Currency per ounce of gold
Return to gold standard?
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Why?
Why not?
Gold Standard History
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Bretton Woods
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Established IMF
Established World Bank
Established gold exchange standard
Decided stable exchange rates better
Dollar became central reserve asset
International Monetary Fund
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Objective
Works with UN
Greater Power?
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Film surveillance
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Two methods
G-8 Countries
Conditionality and Cooperation with World
Bank
World Bank
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Multilateral development banks
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Roles of developing and developed countries
World Bank
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$16 billion in loans annually
Hard loans
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Encourage investors
World Bank
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International Finance Corporation
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Investment banker
Favors joint ventures
Create local capital markets
International Development Association
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Soft loans
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Why?
World Bank
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Multilateral Investment Guarantee
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International Center for Settlement of
Investment Disputes
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152 countries
$30 billion in private investment in 70 developing
countries
Capacity building and advisory services
Advisory and research services
Problems with World Bank
World Bank
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Other Multilateral Banks
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African Development Bank
Disorganization
 Lack of funds
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Asian Development Bank
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Lack of funds
European Bank for Reconstruction and
Development
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Who does it help?
World Bank
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Other Multilateral Banks
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Inter-American Development Bank
U.S. and 45 other countries
 1998- Lending is $10 billion
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Bank for International Settlements
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Location: Switzerland
Anonymous cover
Four functions
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Forum for international monetary cooperation
Center for research
Banker for central banks
Agent for various financial arrangements
U.S. joined in 1994
Balance of Payments
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Deficits- U.S.
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Could be due to inflation
Market measures
 Nonmarket measures
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Balance of Payments
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Current Account
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Capital Account
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Goods/merchandise
Services
Unilateral transfers
Direct investment
Portfolio investment
Short-term capital flows
Official Reserves Account
Balance of Payments
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Temporary Disequilibrium
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Monetary policies
Fiscal policies
Fundamental Disequilibrium
History of U.S. and Gold Standard
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U.S. Dollar became over-valued
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Central banks
Gold Exchange Standard
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Why not de-value the currency?
$35/oz. of gold
Results
1958-1971- U.S ran deficit
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Dichotomy of the situation
History of U.S. and Gold Standard
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August 1971
December 1971 and February 1973
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Fixed currency exchange rates
Floating currency exchange rates
Types of Currency Floats
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Free (clean)
Managed (dirty)
History of U.S. and Gold Standard
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1981-85
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U.S. runs a deficit
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Why?
Sept. 1985
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Group of Five
Today- Group of Eight
 Government reserves today
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Currency Areas
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Snake
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Currencies are floating
Mid-1970’s
Europe
What was it?
Experience with Floating
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Hard to peg
System today- has it held?
Forecasting Float Direction
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Purchasing Power Parity
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Big Mac Index
Starbucks Index
Money Markets and Foreign
Exchanges
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Money Markets
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Which market is the largest?
Grew until 2001
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Why did it stop?
Asian currencies
Most traded currencies
SDRs
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Special Drawing Rights
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How is it calculated?
Uses
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Remains stable
Holders
SDRs as central reserve assets
Replace currencies and gold?
 Reasons
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European Monetary System
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European Monetary Union
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1979
European Monetary Cooperation Fund
1991- Maastricht
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European Central Bank
European Currency Unit
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Why did it work when SDR failed?
Euro
Transition to Euro
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Circulation
European Central Bank
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Powers