Understanding the International Monetary System

1
Understanding the International Monetary System

• Chapter 5

2
Current Trends

• Post-WWII
• Dollars value
• Convertible currencies

3
Gold Standard History

• The Gold Market
• v. platinum v. diamond
• Gold Standard
• Currency per ounce of gold
• Return to gold standard?
• Why?
• Why not?

4
Gold Standard History

• Bretton Woods
• Established IMF
• Established World Bank
• Established gold exchange standard
• Decided stable exchange rates better
• Dollar became central reserve asset

5
International Monetary Fund

• Objective
• Works with UN
• Greater Power?
• Film surveillance
• Two methods
• G-8 Countries
• Conditionality and Cooperation with World Bank

6
World Bank

• Multilateral development banks
• Roles of developing and developed countries
• World Bank
• 16 billion in loans annually
• Hard loans
• Encourage investors

7
World Bank

• International Finance Corporation
• Investment banker
• Favors joint ventures
• Create local capital markets
• International Development Association
• Soft loans
• Why?

8
World Bank

• Multilateral Investment Guarantee
• 152 countries
• 30 billion in private investment in 70
  developing countries
• Capacity building and advisory services
• International Center for Settlement of Investment
  Disputes
• Advisory and research services
• Problems with World Bank

9
World Bank

• Other Multilateral Banks
• African Development Bank
• Disorganization
• Lack of funds
• Asian Development Bank
• Lack of funds
• European Bank for Reconstruction and Development
• Who does it help?

10
World Bank

• Other Multilateral Banks
• Inter-American Development Bank
• U.S. and 45 other countries
• 1998- Lending is 10 billion

11
Bank for International Settlements

• Location Switzerland
• Anonymous cover
• Four functions
• Forum for international monetary cooperation
• Center for research
• Banker for central banks
• Agent for various financial arrangements
• U.S. joined in 1994

12
Balance of Payments

• Deficits- U.S.
• Could be due to inflation
• Market measures
• Nonmarket measures

13
Balance of Payments

• Current Account
• Goods/merchandise
• Services
• Unilateral transfers
• Capital Account
• Direct investment
• Portfolio investment
• Short-term capital flows
• Official Reserves Account

14
Balance of Payments

• Temporary Disequilibrium
• Monetary policies
• Fiscal policies
• Fundamental Disequilibrium

15
History of U.S. and Gold Standard

• U.S. Dollar became over-valued
• Why not de-value the currency?
• Central banks
• Gold Exchange Standard
• 35/oz. of gold
• Results
• 1958-1971- U.S ran deficit
• Dichotomy of the situation

16
History of U.S. and Gold Standard

• August 1971
• December 1971 and February 1973
• Fixed currency exchange rates
• Floating currency exchange rates
• Types of Currency Floats
• Free (clean)
• Managed (dirty)

17
History of U.S. and Gold Standard

• 1981-85
• U.S. runs a deficit
• Why?
• Sept. 1985
• Group of Five
• Today- Group of Eight
• Government reserves today

18

• Currency Areas
• Currencies are floating
• Snake
• Mid-1970s
• Europe
• What was it?
• Experience with Floating
• Hard to peg
• System today- has it held?

19
Forecasting Float Direction

• Purchasing Power Parity
• Big Mac Index
• Starbucks Index

20
Money Markets and Foreign Exchanges

• Money Markets
• Which market is the largest?
• Grew until 2001
• Why did it stop?
• Asian currencies
• Most traded currencies

21
SDRs

• Special Drawing Rights
• How is it calculated?
• Uses
• Remains stable
• Holders
• SDRs as central reserve assets
• Replace currencies and gold?
• Reasons

22
European Monetary System

• European Monetary Union
• 1979
• European Monetary Cooperation Fund
• 1991- Maastricht
• European Central Bank
• European Currency Unit
• Why did it work when SDR failed?
• Euro
• Transition to Euro
• Circulation
• European Central Bank
• Powers