Chapter 11: International Monetary System

What have been the reasons for various monetary crises and what role has the IMF played in these?

Greece: provided loans

soft fixes

few different types of systems, but all involve some sort of official "value" that also reflects market forces. removes short-term volatility but allows the currency to adjust so that the prices of domestic goods do not become too high or low on foreign markets

currency board

hyper-fixed system. govt uses another reference currency as a 100% reserve (like gold standard). generally used in extreme situations to reestablish lost investor confidence

monetary crisis

melt-down in the value of a currency. more common w/ fixed rate currencies when the market determines the currency is worth less than the official rate and starts to sell, prompting the central bank to buy in response

What historical events caused the abandonment of the gold standard?

1. WWI suspended trade between many nations 2. England used gold reserves for war effort & suspended convertibility (b/c Germany tried to demand all its pounds for gold) 3. Currencies "floated": no govt guarantee of rate (market decides)

chaos following collapse of gold standard (6)

1. competitive devaluations to inc national employment 2. retaliation and trade barriers 3. trade contracted 4. employment declined 5. depression 6. WWII

advantages of floating rate system (3)

1. exchange rates are "real"/transparent 2. less need for intl coordination 3. policy makers can focus on domestic issues, not on managing the rate

Jamaica Agreement

1. fixed (par) values not required (floating exchange rates permitted) 2. IMF gold reserves returned 3. IMF reserves increased (to prepare for lending needs in case of inc. volatility) 4. IMF role in economic assistance continued

What are different system used to manage exchange rates today?

1. floating rate system 2. fixed rate system 3. managed float 4. soft fixes 5. currency board

How did/does exchange rate adjustment occur under various systems (i.e. gold, Bretton Woods, floating, fixed, managed float)

1. floating: adjusted in response to market supply/demand 2. fixed rates set by govt and adjusted as issuing countries see fit 3. gold standard: self-correcting system based on trade (inc imports = dec gold = prices deflate = gold flows in) *no exchange rate change 4.

Issues for the IMF

1. global crisis and reserves for loans 2. "rich" nations' power 3. "conditionality" and expertise 4. mistrust among developing nations 5. moral hazard

What have been stages in the evolution of the international monetary system?

1. gold standard 2. Bretton Woods system 3. current multi-form system (continuum with different forms from floating to fixed)

advantages of fixed rate system (3)

1. no short-term variation/uncertainty 2. stability facilitates business 3. anti-inflationary

Goals of IMF (6)

1. promote exchange rate stability 2. establish confidence in international monetary system 3. facilitate expansion of trade 4. promote monetary cooperation 5. assist members in overcoming short-term BOP disequilibrium 6. facilitate multilateral payments (loans)

How did the Bretton Woods system alleviate some problems of the gold standard?

1. rather than being pegged with gold, currency values pegged to the USD (dollar pegged to gold) 2. national reserves could be in currency & mostly USD and not necessarily gold 3. there was some flexibility in exchange rates

Which exchange rate system is preferable?

1. small nations dependent on trade: fix 2. financial markets undeveloped: fixed 3. weak central bank: fix 4. inflation rate relative to trade partners higher: float 5. capital is mobile: float

Mexico Tequila Crisis

Mexican peso financial crisis

What was the gold standard & how did it work?

an agreement that countries would measure the value of their national currency according to an ounce of gold. facilitated trade b/c par value of gold created exchange rates between currencies (common reference point)

What was the initial role of the IMF in the international monetary system?

primary role was to monitor the BW systems -make sure currencies were within 1% of dollar peg -coordinate buying/selling by central banks to maintain pegs -make loans in the case of nation's running out of reserves to support currencies -declare a "fundamental disequilibrium" if currency peg not sustainable

Why did the Bretton Woods system collapse?

the US could no longer guarantee gold redemption for the dollar

How has the role of the IMF (and attitudes toward the IMF) changed over time?

when BW collapsed most of its tasks went with it. tasked with maintaining stability, so the need for the IMF to issue loans to countries who needed more reserves to support their currency values inc. global influence has waned

fixed rate system

when a nation sets an "official" rate relative to some other reference point (i.e. another currency) -adv: stability -disadv: economy must adjust to trade balance differences

managed float (dirty float)

when the country doesnt announce any official exchange rate, but does engage in buying and selling of their own currency trying to hit a "target" level relative to one+ currencies

floating rate system

when the market sets the values