Chapter 11: The International Monetary System

World Bank

- end extreme poverty - promote shared prosperity - provide low-interest, no-interest loans to developing countries - provide support through policy advice, research, analysis, technical support - investing in developing economies and eliminating poverty - World Bank aka the International Bank for Reconstruction and Development worldbank.org

Banking crisis

- loss of confidence in the banking system that leads to a run on banks (Ireland 2008)

IMF Debate

IMF-mandated macro economic policies are under serious debate, with critics charging that at times the IMF imposes inappropriate conditions on developing nations. One size fits all approach to macro economic policy that may be inappropriate for many countries Moral hazard - people behave recklessly because they know that will be saved if things go wrong Lack of accountability - has become too powerful for an institution that lacks any real mechanism for accountability

Financial Crises post Bretton Woods

currency crisis, banking crisis, foreign debt crisis

Examples of austerity measures

cutting governmental spending and raising taxes.

Floating Exchange Rate System

exists when a country allows the foreign exchange market to determine the relative value of a currency the U.S. dollar, the EU euro, the Japanese yen, and the British pound all float freely against each other their values are determined by market forces, government intervention and fluctuate day to day Brexit - June 23, 2016 - UK withdrew from the European Union

History - The Jamaica Agreement (1976)

floating rates were declared acceptable gold was abandoned as a reserve asset total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion Ø today they are about $767 billion

Mexico Peso Crisis

https://www.youtube.com/watch?v=hTWLEhlq1cQ Loan guarantee for Mexico $20 billion reserve to stabilize the economy # 2 trading partner rescued Tax payer finance bail-out?

Currency Boards

monetary authority and commitment from the country to convert its domestic currency on demand into another currency at a fixed exchange rate holds currency in reserve

Pegged Exchange Rate System

(developing nations) - currency fixed relative to a reference currency (ex. US dollar) US dollar goes up in value so does the Vietnamese Dong

International Monetary Fund (IMF)

- organization of 189 countries - ensure stability of international monetary system - provided much-needed foreign currency reserves that allowed the government to meet its foreign-debt obligations and to support the value of the local currency - imposed strict austerity measures that were intended to stabilize prices and maintain steady currency values - Overlapping finance arms of the United Nations - monitors exchange rates, stabilizes global monetary systems and global monetary cooperation - prevents domino effect - avoiding a repetition of the chaos that occurred between the wars through a combination of discipline and flexibility. IMF.org https://www.youtube.com/watch?v=MhrC2_Hak08

Currency Crisis

- speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency (Brazil 2002)

Foreign debt crisis

- when a country cannot service its foreign debt obligations (Greece, Ireland, Portugal in 2010)

What is the interest rate on loans from the IMF to low-income countries?

0%

What are the three main priorities of The World Bank? Work with countries to end poverty and boost prosperity for the poorest people

1) Help create sustainable economic growth 2) Invest in people through healthcare, education, water, sanitation and energy 3) Build resilience to shocks and threats

Floating Rates

1)Monetary policy autonomy - 2) Automatic trade balance adjustments - IMF would need to agree to currency devaluation 3) Help countries recover from financial crisis

History - Fixed Exchange Rate System Collapse

Bretton Woods worked well until the late 1960s ØHuge increases in the welfare programs ØVietnam war - financed by increasing money supply ØSignificant inflation The system relied on an economically well managed U.S., when the U.S. began to print money, run high trade deficits, and experience high inflation, the system was strained to the breaking point SEE SLIDE 11

Supports for International Monetary System

Political Stability - United Nations Economic Stability - World Bank, International Monetary Fund https://www.youtube.com/watch?v=WG72yk60tbA

International monetary system

Sets of internationally agreed rules, conventions and supporting institutions that facilitate trade, cross border investment and generally, the reallocation of capital between nation states. •Inspire confidence •Sufficient liquidity for fluctuating levels of trade

List 3 activities that the IMF is involved with

Surveillance - maintain stability and prevent crises in the international monetary system - provides advice Financial assistance - aka loans for actual or potential balance of payment problems (international payments between countries) Technical assistance and training - build better economic institutions and strengthen human capacities

Bretton Wood Agreement (1944)

The International Monetary Fund (IMF) to maintain order in the international monetary system through a combination of discipline and flexibility Øfixed exchange rates Østopped competitive devaluations Øbrought stability The World Bank to promote general economic development

Fixed Exchange Rates

countries fix their currencies against each other at some mutually agreed on exchange rate Uncertainty - currency speculation is detrimental Lack of connection between the trade balance and exchange rates

Gold Standard

refers to a system in which countries peg currencies to gold and guarantee their convertibility The gold par value refers to the amount of a currency needed to purchase one ounce of gold The great strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries By 1939, the gold standard was dead

What is the mission of The World Bank?

ØTo end extreme poverty by reducing the share of the global population that lives in extreme poverty by 3% by 2030 ØTo promote shared prosperity by increasing the incomes of the poorest 40 percent of the people in every country.

History - Bretton Woods System (1944)

Øa fixed exchange rate system was established Øall currencies were fixed to gold, but only the U.S. dollar was directly convertible to gold ØCurrency devaluations could not to be used for competitive purposes Øa country could not devalue its currency by more than 10% without IMF approval