Transcript Document
chapter five Understanding the International Monetary System McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives • Explain the functioning of the gold standard • Describe the purposes of the IMF • Appreciate the accomplishments of Bretton Woods system and the ensuing developments shaping the world monetary system • Describe the purpose of the World Banks • Discuss the purpose of the Bank for International Settlements 5-3 Learning Objectives • Discuss the floating exchange rate system • Describe the development of the euro • Explain the role of the Balance of Payments (BOP) • Discuss the major BOP accounts • Explain the use of Special Drawing Rights (SDRs) 5-4 Gold Standard • Gold Standard – The use of gold at an established number of units per currency • Bretton Woods – The New Hampshire town where treasury and central bank representatives met near the end of World War II to establish the IMF, the World Bank, and the gold exchange standard 5-5 International Monetary Fund • International Monetary Fund (IMF) – Institution that coordinates multilateral monetary rules and their enforcement • Triffin paradox – The concept that a national currency that is also a reserve currency will eventually run a deficit, which eventually inspires a lack of confidence in the reserve currency and leads to a financial crisis. 5-6 World Bank • World Bank – Institution that focuses on funding of development projects • Bank for International Settlements – Institution that is the central bank for central bankers 5-7 Currency Exchange Rate Systems • Fixed currency exchange rates – Rates that governments agree on and undertake to maintain • Floating currency exchanges rates – Rates that are allowed to float against other currencies and are determined by market forces • Jamaica Agreement – The 1976 IMF agreement that allows flexible exchange rates among members 5-8 Current Currency Exchange Rate Arrangements • Exchange arrangements with no separate legal tender • Currency board arrangements • Other conventional fixed peg arrangements • Pegged exchange rates within horizontal bands 5-9 Current Currency Exchange Rate Arrangements • Crawling pegs • Exchange rates within crawling bands • Managed floating with no preannounced path for the exchange rate • Independently floating exchange rates 5-10 Euro • Currency of the European Union • 12 EU members have joined the European Monetary Union 5-11 BOP Accounts Table 5.1 • Current account – Records a country’s exports and imports in goods and services • Goods or merchandise account • Services account • Unilateral transfers 5-12 BOP Accounts • Capital account – Records the net changes in a nation’s international financial assets and liabilities • Direct investments • Portfolio Investments • Short-term capital flows • Official Reserves account – Records the assets held by the government; gold, foreign currencies, and accounts in foreign banks; a balance of the country’s foreign currency 5-13 Table 5.1 U.S. International Transactions (millions of dollars) 5-14 Special Drawing Rights • Special Drawing Rights (SDR) – An international reserve asset established by the IMF – The unit of account for the IMF and other international organizations 5-15