Chapter 11: The International Monetary System

many experts have criticized the IMF's policy prescriptions because of:

- inappropriate policies - moral hazard - lack of accountability

what are the factors in the case for fixed exchange rates?

- monetary policy autonomy - trade balance adjustments - crisis recovery - monetary discipline - speculation - uncertainty - trade balance adjustments and economic recovery

prior to the introduction of the euro, some EU countries operated with fixed exchange rates within the context of the:

European Monetary System (EMS)

the jamaica agreement -gold was __________ as a reserve asset

abandoned

the jamaica agreement - floating rates were declared:

acceptable

evaluating the IMF's policy prescriptions - the IMF has become too powerful for an institution that lacks any real mechanism for:

accountability

the key strength of the gold standard was its powerful mechanism for simultaneously allowing all countries to achieve:

balance-of-trade equilibrium

when the income a country's residents earn from its exports is equal to the money its residents pay for imports

balance-of-trade equilibrium

financial crises in the post-bretton woods era - this refers to a loss of confidence in the banking system that leads to a run on the banks

banking crisis

which focus on managerial implications? - the forward market can offer some protection from volatile exchange rates in the shorter term - firms can protect themselves from exchange rate uncertainty over the longer term by building strategic flexibility into their operations that minimizes economic exposure

business strategy

which focus on managerial implications? - firms can influence government policy towards the international monetary system - firms should focus their efforts on encouraging the government

corporate-government relations

the case for floating exchange rates (which case?) - supports of floating regimes argue that they automatically help countries deal with economic crises - investors take their money out of the country, driving down the currency, which then stimulates exports

crisis recovery

a country with a ______________ commits to converting its domestic currency on demand into another currency at a fixed exchange rate

currency board

which exchange rate regime in practice? - the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued - additional domestic notes and coins can be introduced only if there are foreign exchange reserves to back it

currency boards

financial crises in the post-bretton woods era - this occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates

currency crisis

which focus on managerial implications? - the current exchange rate system is a mixed system (government intervention and speculative activity influence currency values) - firms can protect themselves from exchange rate volatility through forward markets and swaps

currency management

under the bretton woods agreement _______________ were not used for competitive purposes

devaluations

which role of the IMF is this describing? - a fixed exchange rate puts a break on competitive devaluations and brings stability to the world trade environment - a fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation

discipline

the roles of the IMF (2):

discipline and flexibility

with _____________________, a country abandons its own currency and adopts another

dollarization

- 21 percent of IMF members allow their currencies to float freely - 23 percent of IMF members follow a managed float system - 5 percent of IMF members have no legal tender of their own (excluding EU countries that use the euro) - the remaining countries use less flexible systems such as pegged arrangements, or adjustable pegs

exchange rate regimes in practice

with a ______________________ countries fix their currencies against each other at a mutually agreed upon value

fixed change rate system

which role of the IMF is this describing? - IMF ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficits - a country could devalue its currency by more than 10 percent with IMF approval (balance of payments needed to be in fundamental disequilibrium)

flexibility

following the collapse of the bretton woods agreement, a ______________ regime was formalized in 1976 in jamaica

floating exchange rate

a ________________________ exists where the foreign exchange market determines the relative value of a currency

floating exchange rate system

financial crises in the post-bretton woods era this is when a country cannot service its foreign debt obligations, whether private sector or government debt

foreign debt crisis

the _____________________ is the primary institution for determining exchange rates

foreign exchange market

mechanics of the gold standard - the exchange rate between currencies was based on the:

gold par value

the amount of a currency needed to purchase one ounce of gold

gold par value

the _________________ is the practice of pegging currencies to gold and guaranteeing convertibility

gold standard

the origin of the ___________________ dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value

gold standard

evaluating the IMF's policy prescriptions - the IMF has been criticized for having a "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries

inappropriate policies

collapse of the fixed exchange system - speculation that the dollar would have to be devalued relative to most other currencies forced other countries to:

increase the value of their currencies relative to the dollar

collapse of the fixed exchange system - during 1965-1968, the US financed huge increases in welfare programs and the vietnam war by increasing its money supply, which then caused significant:

inflation

the __________________ is the institutional arrangement that govern exchange rates

international monetary system

corporate-government relations - promote the growth of:

international trade and investment

crisis management by the IMF - the IMF has redefined its mission, now focusing on:

lending money to countries experiencing financial crises in exchange for enacting certain macroeconomic policies

a _____________________ or ___________________ exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency

managed-float; dirty-float

the case for floating exchange rates (which case?) - because a fixed exchange rate system requires maintaining rate parity, it also ensures that governments do not expand their money supplies at inflationary rates

monetary discipline

the case for floating exchange rates (which case?) - the removal of the obligation to maintain exchange rate parity restores monetary control to a government - with a fixed system, a country's ability to expand or contract its money supply is limited by the need to maintain exchange rate parity

monetary policy autonomy

evaluating the IMF's policy prescriptions - the IMF has also been criticized for exacerbating:

moral hazard

people behave recklessly because they know they will be saved if things go wrong

moral hazard

business strategy - firms can ___________ manufacturing

outsource

the gold standard - to facilitate trade, a system was developed so that payment could be made in __________________ that would be converted to gold at a _____________________

paper currency; fixed rate of exchange

a ____________________________ exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate

pegged exchange rate system

which exchange rate regime in practice? - countries peg the value of their currency to that of other major currencies (popular among the world's smaller nations) - there is some evidence that adopting a pegged exchange rate regime moderates inflationary pressures in a country

pegged exchange rates

collapse of the fixed exchange system - when the US began to __________________, _____________________, and _______________, the system was strained to the breaking point

print money; run high trade deficits; experience high inflation

the period between the wars: 1918 to 1939 - after WWI, countries started ____________ to try to encourage exports

regularly devaluing their currencies

the case for floating exchange rates (which case?) - fixed exchange rate regime prevents destabilizing speculation

speculation

business strategy - firms can maintain ______________ and disperse production to different locations

strategic flexibility

the goal of this new international monetary system designed in 1944 was to build an enduring economic order that would facilitate postwar economic growth

the bretton woods system

the jamaica agreement - the IMF's articles of agreement were revised to reflect:

the new reality of floating exchange rates

the role of ____________________ - under the IRBD scheme, money is raised through bond sales in the international capital market and borrowers pay what the bank calls a market rate of interest, which is the bank's cost of funds plus a margin for expenses - under the International Development Agency scheme, loans go only to the poorest countries

the world bank

fixed versus floating exchange rates: who is right?

there is no real agreement as to which system is better (a different system might be more enduring and might foster the kind of stability that would facilitate more rapid growth in international trade and investment)

all IMF loan packages come with conditions attached, generally a combination of:

tight macroeconomic policy and tight monetary policy

the case for floating exchange rates (which case?) - the balance of payments adjustment mechanism works more smoothly under a floating exchange rate regime - under the bretton woods system (fixed system), IMF approval was needed to correct a permanent deficit in a country's balance of trade that could not be corrected by domestic policy alone

trade balance adjustments

the case for floating exchange rates (which case?) - floating rates help adjust trade imbalances and can help with economic recovery after a crisis

trade balance adjustments and economic recovery

the case for floating exchange rates (which case?) - uncertainty associated with floating exchange rates makes business transactions more risky

uncertainty

corporate-government relations - adopt an international monetary system that minimizes:

volatile exchange rates

exchange rates since 1973 have become more ______________ and less __________________

volatile; predictable

financial crises in the post-bretton woods era (3):

1. currency crisis 2. banking crises 3. foreign debt crisis

the international monetary system affects international managers in three ways:

1. currency management 2. business strategy 3. corporate-government relations

the bretton woods agreement established two multinational institutions:

1. the international monetary fund (IMF) to maintain order in the international monetary system 2. the world bank to promote general economic development

under the bretton woods agreement a country could not devalue its currency by more than __________ percent without IMF approval

10

the jamaica agreement - total annual _____________ -- the amount member countries contribute to the IMF -- were increased to $41 billion

IMF quotas

under the bretton woods agreement the ___________ was the only currency to be convertible to gold, and other currencies would set their exchange rates relative to it

US dollar

the collapse of the bretton woods system can be traced to:

US macroecomonic policy decisions