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IMF > IMF Chapter 11 > Flashcards

IMF Chapter 11 Flashcards

1
Q

What features did the Bretton woods system had?

A
  1. A fixed but adjustable exchange rate
  2. Setting up of the IMF with monitoring duties and the International bank of Reconstruction and Development (IBRD)(World Bank)
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2
Q

Explain the fixed but adjustable exchange rates

A

The rates were assigned a central parity to the US dollar and was allowed to fluctuate +- 1%, moreover, the US dollar was fixed at 35$ per ounce

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3
Q

When was a country allowed to revalue under the Bretton woods system?

A

When a country faced fundamental disequilibrium and then they were allow to revalue if it was less than 10% otherwise it required the permission from the IMF

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4
Q

What could a country employ if it faced BOP deficits?

A

The IMF employed a credit mechanism that entitled them to the first 25% of the then assigned quota, the first tranche was called the gold tranche.

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5
Q

When did the Bretton woords commenced operation?

A

March 1947

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6
Q

When did the European Payments Union (EPU) commence operations?

A

1950

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7
Q

When was the General Arrangement to Borrow (GAB) commenced?

A

1962

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8
Q

When did Nixon announce in 1971?

A

That US dollar was no longer convertible to gold.

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9
Q

How did the joint float work against the Dollar?

A

IT was called the Snake in the Tunnel, were able to fluctuate 1.125% to each other (The Snake) and 2.25% against the Dollar (The Tunnel)

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10
Q

Where did the Bretton Woods depended on to work?

A
  1. US ran deficits
  2. central banks demanded confidence in the US dollar
  3. convertibility to gold
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11
Q

What was the Triffin Dilemma?

A

Continued US deficits would undermine the Bretton Woods system, yet if the US would curb these deficits than it would undermine the growth of world trade and exert deflationary pressures on the world economy.

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12
Q

What were the problems that led to the breakdown of the Bretton woods system?

A
  1. Problems of liquidity,
  2. Lack of an adequate adjustment mechanism
  3. A confidence problem
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13
Q

What was the goal of the Bretton Woods system?

A

Goal of achieving both internal and external balance and enhances both discipline and flexibility

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14
Q

What are the crisis commonalities?

A
  1. Fundamental before crisis: often weak and capital mobility
  2. Events that triggered the crisis
  3. Big band (breakdown of peg): peg collapses
  4. Role of IMF
  5. Spillovers to other countries
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15
Q

What were 4 important currency crisis?

A
  1. ERM (1992-1993)
  2. Mexico (1994-1995): exchange rate peg
  3. East Asia (1997-1998): exchange rate peg
  4. Argentina (2002): currency board
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16
Q

Analyse ERM crisis using the commonalities

A
  1. Fundamentals: Germany set a high interest rate, so Italy and Uk had to follow, problem of a policy dilemma (EB or IB) + capital mobility
  2. Events: Denmark rejected Maastricht Treaty
  3. Big ban: Several pegs collapsed and bands widened +- 15%
  4. Role of IMF: IMF passive
  5. Spillover: Crisis spread to most ERM countries
17
Q

Analyse Mexico crisis using the commonalities

A
  1. Fundamentals: Current account and fiscal deficits + capital mobility
  2. Events: Civil unrest, assasination of president candidate -> capital outflow
  3. Big band: Devaluation of Peso and float
  4. Role of IMF: IMF package that avoided external debt default
  5. Spillovers: Increase in Mexico competitiveness after depreciation but cause Tequila effect (risk reassessments in other developing countries
18
Q

Analyse East Asia crisis using commonalities

A
  1. Fundamentals: Structural problems: public guarantees for investments, poor evaluation -> moral hazard and adverse selection: unprofitable investments + capital mobility
  2. Events: No clear spark
  3. Big band: Thai bath and other currencies in the region fell
  4. Role of IMF: IMF loans to several countries
  5. Spillover: Increased Thai competitiveness and risk reassessments caused problem in region (Asian flu was contagious)
19
Q

What are the pros and cons of a currency board?

A

pros:
1. CB cannot expand the money supply much
2. Government is not allowed to sell bonds to CB
3. Standard advantages of fixed rates

Cons:
1. CB is unable to lend to bank in crisis
2. How to convince market that currency board will not be suspended
3. Standard disadvantages of fixed rates

20
Q

Analyse the Argentinian crisis using commonalities

A
  1. Fundamentals: CA deficit, fiscal deficit + recession + capital mobility
  2. Events: rumors about adjustment/suspension of currency board
  3. Big band: Restricted cash withdrawals, devalued peso and a float
  4. Role of IMF: IMF loan
  5. Spillover: regional impact
21
Q

Is limiting Capital mobility a solution for disruptive exchange rate movements?

A

Well imposing a small tax on forex transaction could help prevent crisis, however this might get circumvented by financial innovation and reduce market liquidity

22
Q

What are the pros and cons of getting a hard peg and giving up your own currency?

A

pros:
1. No devaluation possible
2. No currency risk: Es=0 and reduces Rp -> r lower
3. Standard advantages of fixed exchange rates
Cons:
1. CB cannot buy H bonds to increase money supply
2. Loss of policy flexibility
3. Fiscal deficits have to be financed by (dollar) bonds

23
Q

Rogoff et al (2003) distinguished between the jure regime and facto regime. Explain his point

A

there is as this moment no movement toward bipolarity. Developing countries moved towards a more fixed regimes and Emerging markets have moved to managed float

24
Q

What happened between 1879-1914?

A

Gold standard introduced that assured fixed price and stability

25
Q

What happened between 1914-1918?

A

There was a need for flexibility for war and gold standard was suspended

26
Q

What happened between 1918-early 20s?

A

Reconstruction was financed by printing money, gave flexbility but inflation

27
Q

What happened in 1920s?

A

Back to gold standards, but smaller countries pegged currencies to large countries

28
Q

What happened in 1930s?

A

Economic depression where IB preceded EB, brought instability and floating rates

29
Q

What happened in 1940s?

A

Need for a monetary system that made IB and EB possible

30
Q

What was introduced in 1944?

A

Bretton Woods system that gave discipline and flexibility and fostered IB and EB

31
Q

What was exposed in the 1960s?

A

THe triffen dillema, where the trade-off between need for liquidity and maintaining confidence in $

32
Q

What happened in the end of 1960s?

A

U.S government deficit increased a lot, dollar became overvalued and investors speculated against the dollarH

33
Q

What happened in 1971?

A

President Nixon issued that the US dollar is no longer convertible into gold

34
Q

What was the Smithsonian agreement in 1971?

A

Dollar devaluation and revaluation of other currencies

35
Q

What happened in 1973?

A

Floating as interim arrangement and new speculations

IMF (12 decks)

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