The international monetary system Flashcards
exchange rate of regime definition
The way in which a country manages its currency and thus the arrangement of the price of that country’s currency as determined on foreign exchange markets.
arrangements ranging from :
Floating Rate
Managed Rate (AKA “Dirty Float”)
Pegged Rate
three distincts period
1816-1914: Gold standards
1945-1973 : bretton woods
1973 - now : mixed system
origin of exchange of rate system
Industrial revolution : increase of the production of goods and the basis of world trade + to facilitate world trade was a stable exchange rate system. + necessary to encourage and settled commercial transactions across borders
Gold standard
-required domestic currencies (national money)
- The Gold Standard also required that each country adjust its domestic money supply in direct relation to the amount of gold it held.
- Increase in gold would increase the domestic money and a reduction in its gold supply would reduce the money supply.
end of the gold standard
WWI : countries suspended the convertibility of their currencies into gold + most countries were more concerned with their national economies than exchange rate stabilty
Bretton woods (a pegged regime)
- meeting of allied countires in Bretton Woods
- restarting world trade
- Pegging the U.S. dollar to gold at $35 per ounce (with the USD the only currency convertible into gold).
All other countries peg their currencies to the U.S. dollar.
Countries agreed to “support” their exchange rates within + or – 1% of these par values.
This is done through the buying or selling of foreign exchange when market forces needed to be offset. - Creation of WMF and the World Bank
The end of the Bretton woods
- 1960 - 1973
- President Lyndon Johnson tries to finance both his “Great Society” programs at home and the American war in Vietnam
- US federal budget deficit
- high inflation in The US
- increase in US spending for cheaper imports
-US dollar can not be anymore backup by gold so it is become overvalued
exchange rate regimes today
- influence by the national government involvement in affecting their currency exchange rate
- very little involvement : forex market is determining exchange rate
- active involvement : governement is managing or pegging exchange rate
Mixed inetrnational monetary system consisting of :
-floating exchange rate regimes : depend purely of demand and supply, no intervention from the governement (nagative point : increase in speculative activity of investitors, positive point, no need for any Foreign exchange reserves)
-manage rate regime : value measeared in terms of foreign currency. mixed btwn free floating exchange rate system and the intervention of gov to moderate the undue-short term fluctuation by appreciating or depreciating their currency (negative: problem realted to the need to maintain foreign exchange reserves, good : limit speculative activity)
- pegged exchange rate regime (fixed exchange rate system) : the gov fixes and guarantees the offical price of its currency (good : confidence and certainty for trade and investment decisions; bad: forgo interest rate as a policy tool, currency crisis, maintain large foreigner exchanges reseves)
