International Monetary System
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Transcript International Monetary System
The International Monetary
System
International Finance
Dr. A. DeMaskey
Learning Objectives
What
different exchange rate systems are used by
various governments?
What are the characteristics of an ideal currency?
What currency regime choices do emerging
market countries have?
How was the euro created and what are its effects?
What are the origins and proposed mechanisms to
deal with various emerging market currency
crises?
The International Monetary
System (IMS)
Official
Part of the International Financial
System
Presents a Structure within which
• Exchange rates are determined
• Trade and capital flows are accommodated
• Balance of payments adjustments are made
Operates
under a set of policies, institutions,
practices and regulations.
Alternative Exchange Rate
Systems
Fixed
Rates
Freely Floating
Managed Float
Pegged Exchange Rates
Target Zone Arrangement
Fixed Exchange Rate Systems
Gold
Standard (1821-1914)
Gold Exchange Standard (1925-1931)
Fixed Rates with Narrow Bands - Bretton
Woods System (1944-1971)
Fixed Rates with Wider Bands -Smithsonian
Agreement (1971-1973)
Gold Standard (1821-1914)
Gold
is the dominant international money
Currencies are valued in terms of a gold
equivalent
All players had to adhere to the rules of the
game
Government intervention
International reserves
Limited growth of the money supply
Automatic balance of payment adjustments.
Gold Exchange Standard
(1925-1931)
Each
currency is freely convertible into gold
at a fixed rate but also into other currencies
at relatively stable prices.
Greater convenience for international
traders and investors.
Bretton Woods System (1944-1971)
Fixed Rates with Narrow Bands
A dollar
based system
Maintain a fixed, or pegged, exchange rate in
terms of gold or the U.S. dollar
Dollar per gold value of $35.00
Allow currencies to fluctuate within a
narrow band of ±1%.
Government intervention
International reserves
Smithsonian Agreement (1971-1973)
Fixed Rates with Wider Bands
Dollar
per gold value was changed to
$38.02
Allow currencies to fluctuate within a wider
band of ±2.25%.
Floating Exchange Rate Systems
Free
or Clean Float (March 1973)
Managed or Dirty Float (January 1976)
Joint Float - European Monetary System
(March 1979)
Freely Floating Exchange Rate
System
Market
forces determine the exchange rate
No government intervention
No need for international reserves
Independent monetary and fiscal policies
No capital flow restrictions
Price instability
Managed Floating Rate System
Market
forces determine the exchange rate
Some government intervention
Jamaica Agreement (January 1976)
Plaza Agreement (September 1985)
Louvre Accord (February 1987)
Contemporary Currency Regimes
IMS
(national currencies, artificial
currencies, composite currency)
Exchange Rate Regimes (8)
• Rigidly fixed system (euro area)
• Independently floating (developed and
emerging market countries)
Fixed vs. Flexible Exchange
Rates Systems
Preference
for fixed exchange rates
Anti-inflationary
Large international reserves
Inconsistency with economic fundamentals
Attributes of the Ideal Currency
Fixed
value
Convertibility
Independent
monetary policy
Emerging Markets and Regime
Choices
A currency
board is a system for
maintaining the value of the local currency
with respect to some other specified
currency.
Dollarization refers to the replacement of a
local currency with U.S. dollars
Currency Board System
Argentina
(1991)
Fixed Rate System
100% Reserve System
Monetary Policy and Money Supply
Dollar-Denominated Accounts (interest
differential)
End of Argentine Currency Board (2002)
More…
Currency Board System
Characteristics
• No Central Bank
• No Discretionary Monetary Policy
Advantages
• Promotes price stability
• Responsible fiscal policy
Disadvantages
• Sharp contraction in money supply
• High interest rates
Dollarization
Use
of U.S. dollar as the official currency
• Panama, Ecuador, Liberia
Requires
change in structure and responsibilities
of monetary policy authorities
Arguments for:
• Removes currency volatility against dollar
• Expectations of greater economic integration
Argument
against:
• Loss of sovereignty over monetary policy
• Loss of power of seignorage
• Loss of role of lender of last resort
The Birth of a European
Currency: The Euro
European
Monetary System
• Target Zone Arrangement
• Pegged Exchange Rate System
• Joint Float Agreement
European
Monetary Union
• Why Monetary Unification?
• Launch of the Euro
• How to Achieve Monetary Unification?
Target Zone Arrangement
Member
countries maintain fixed exchange
rates within a flexible range, called target
zone, among themselves.
Each member’s currency is pegged to all the
other members’ currencies.
The group as a whole floats jointly against
the rest of the world.
The EMS:
A Joint Float Agreement
EMS
members peg their currencies to each
other.
Exchange outside the EMS is subject to a
managed float.
Objective: Exchange rate stability.
Summary of Historical Events Leading Up
to EMU
1957 Treaty of
Rome - EEC
1972 the
“monetary
Snake”
1979 the European
Monetary System
begins
1991Maastricht
Treaty
1995 Madrid
confirms timetable
1/1/99 conversion
Maastricht Treaty
(December 1991)
Common
European Currency - Euro
• Fixed rate system
• Replaces individual national currencies
European
Central Bank (ECB)
• Issues common currency
• Conducts monetary policy
The Maastricht Treaty Criteria
Inflation not to exceed that in three EU states with the
lowest rate by more than 1.5%.
Long-term interest rates not to exceed that in three
EU states with the lowest inflation rates by more than
2%.
The annual fiscal deficit not to exceed 3% of GDP.
Cumulative public debt not to exceed 60% of GDP.
A country must have maintained its membership in
the EMS for two years without having initiated a
devaluation.
Milestones on the Road to
Monetary Union
Dec. 31, 1999
Euro exchange rates are fixed. ECB takes over monetary
policy for all eleven EMU nations.
Jan. 4, 1999
Stock and bond markets convert to euro.
1999-2001
Foreign exchange transactions denominated in euros.
Jan. 1, 2002 (E-Day)
Euro notes and coins must be in circulation in all EMU
member states.
July 1, 2002
National currencies no longer legal tender.
Monetary Unification
Why
Monetary Unification?
• A single currency area called euro zone
• Competing globally
How
to Achieve Monetary Unification
• Fiscal policy
• Monetary policy
• Fixing the value of the euro
Performance
of The Euro
Useful Websites
A table
showing the currencies of the world and
their exchange rate arrangements can be found at:
• http://pacific.commerce.ubc.ca/xr/currency_table.html
For
more information on the euro, visit:
• http://www.euro.ecb.int/en.html
• http://www.ecb.int/
• http://pacific.commerce.ubc.ca/xr/euro/
Emerging Market Currency
Crises
Currency
•
•
•
•
Crises
Mexican crisis of 1994-1995
Asian crisis of 1997
Russian crisis of 1998
Brazilian crisis of 1998-1999
Transmission
Mechanisms
• Trade Links
• Financial System
More…
Emerging Market Currency
Crises
Origins
• Moral Hazard
• Fundamental Policy Conflict
Policy
Proposals
• Currency Controls
• Free Float
• Fixed Exchange Rates