International Monetary System Flashcards
What is the function of money
Medium of exchange
Store value
Unit of account
What are the forms of money
Fiat currencies = coins, paper, electronic money
Central bank money = cash and foreign currencies and gold
Commercial bank money = private money = digital deposit
What are the types of exchange rate regime
Fixed
- hard peg
*dollarization, monetary union, currency board
- soft peg
*crawling peg, horizontal peg
Floating/flexible
- independent float
- managed float
Non-convertible
What do fixed exchange rates do?
Provides stability in international prices
Monetary discipline
Lower inflation
Limits speculation
Reduced uncertainty
Risk of over evaluation
Vulnerable to shocks
What do floating/flexible exchange rates do?
Monetary policy autonomy
Automatic adjustment of trade shocks
Does not require large quantities of foreign currency reserves
Risk of exchange rate volatility
Risk of imported inflation
What is the Canadian monetary policy
Flexible/floating exchange rate
Inflation targeting approach
Overnight interest rate
How do interest rate affect currency value
^ interest rates -> ^ demand of currency -> ^ currency value -> ^ prices -> down demand
What are the different eras of the international monetary system?
Gold standard
Interwar
Bretton woods
Recent period
What defined gold standard era
Countries set par value for their currency in terms of gold (gold standard)
Currency par value was based on purchasing power parity
Exchange rates were fixed by international agreements
What were the advantages of the gold standard
Reduces risk in exchange rates because it maintained a fixed exchange rate between currencies
Imposes strict monetary discipline on all countries that participate in that system, controlling inflation
Can help correct a nation’s long-term trade imbalance
What defined the interwar era
Currencies were allowed to fluctuate over a fairly wide range in terms of gold and each other
Increasing fluctuations Ain currency values became realized as speculator sold short weak currencies
After ww2 the US dollar was the only major trading currency that continued to be convertible
What was the bretton woods agreement
Created the post-war international monetary system
The agreement established the US dollar based monetary system
Created the imf and world bank
All countries fixed their currencies in terms of gold but were not required to exchange their currencies for gold
US dollar remained convertible into gold at 35$/oz
What are the functions of the IMF
Promote international monetary cooperation
Promote exchange rate stability
Improve availability of resources to members experiencing balance of payment difficulties
Facilitate international trade
Assist in the establishment of a multilateral system of payments
Surveillance
What are the roles of the world bank
Fund post-war reconstruction
Overshadowed by the Marshall plan
Since then supported general economic development
What created the collapse of the fixed exchange rate system
Widely diverging monetary and fiscal policies
Different rates of inflation
Various currency shocks weakened the system
Consistent and growing balance of payment deficit
Lack of confidence in the ability of the us to meet its commitment to covert dollars to gold
What are the common causes of currency crises
Fiscal policies
High inflation
Widening current account deficit
Excessive expansion of domestic borrowing
Asset price inflation
Reversal of capital inflow
Speculation
What is a digital currency
Monetary value that is stored in an electronic device including computer, cloud tablet, mobile phone
What are different types of digital currencies
Digital assets
Cryptography
Smart contracts
Distributed ledger technology/ blockchain
Tokenization
Nonfungible token
What are some factors influencing the growth of digital currency?
Digital technology
E-commerce
E-payments
Advancement of technology
COVID-19
What are the types of digital currencies
Centralized
- central bank digital currency
- stable coin
Decentralized
- cryptocurrency
- stable coin
What is centralized digital currency
Often managed by a central issuer that assumes e-money as its liability
Generally accepted by wide range of people and institutions
What are different types of centralized money
Mobile money
Computer game money
Big-tech credit
Central bank digital currencies
What are decentralized digital currencies?
Based on a dispersed network of users with no-one user recognizing e-money as its liability
Peer-to-peer computer network using blockchain technology
Cryptographic tools to update and track records of a common ledger among members
Does bitcoin qualify as money
No because
Not yet accepted as a medium of exchange
Not yet a unit of account
Store of value is too volatile
No intrinsic vamue
What are some disadvantages of bitcoin
Not backed by underlying asset of financial institution
Not environmental friendly
Cyber criminals
Cannot be used to overcome a financial crisis
What are stable coins
Crypto tokens that serve as digital replications of those assets
Use decentralized blockchain technology as their trading payment infrastructure
Potential to disrupt the current financial system
Issued by private platform, often combine the role of money and data gathering/social networking
What are the types of decentralized stable coins
Elasticity supply chain
Collateralized debt positions
Self-collateralized stable coins
Bond redemption coins
Collateralized redemption coins
What are advantages and disadvantages of stable coins in the international monetary system
Advantages
- digitizations of assets
- fractionalization of assets
- traceability of assets
- lower costs for international payments
- less time to settle transactions
- stimulates improvement of trad financial system
Disadvantages
- requires new regulations
- Monetary policy limitation
- less trust
- higher cyber crimes risks
- fluctuates with underlying assets
What are the implications of digital currencies for international business
Lead to change in demand for cash
Affect balance sheet of central banks
Affect bank of canadas ability to influence monetary policy and financial stability
Affect nation’s payment clearing and settle to infrastructure
Can accelerate the transfer of payments across countries and reduce the cost of international transactions
Lack of centralized authority can increase risk of fraud
What are the characteristics of the central bank digital currency
Digital money issued by the central bank
Pegged to fiat currency
Serves the unbanked
Easily accessible everywhere on mobile phones
Provides financial stability
Less cost compared to printing coins and paper notes
Reduce cross-border payment cost
Can reduce delay in cross-border payments
