The International Monetary System Flashcards
What are the five distinct stages of the International Monetary System?
Bimetallism: Before 1875 Classical Gold Standard: 1875 - 1914 Interwar Period: 1915 - 1944 Bretton Woods: 1945 - 1972 Flexible Exchange Rate Regime: Since 1973
Bimetallism
The maintenance of free coinage for both gold and silver
Exchange Rate determination of countries on the bimetallism standard
The exchange rate was determined by the gold or silver content in their coins
Gershmam’s Law
“Bad” Abundant money drives our “Good” scarce money
No separate Legal Tender
The currency of another country circulates as the sole legal tender. Adopting such an arrangement implies complete surrender of the monetary authorities control over the domestic monetary policy. Eg, Ecuador, El Salvador, Panama
Currency Board
A monetary arrangement based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfilment of its legal obligation. This implies the domestic currency is fully backed by foreign assets, eliminating the traditional central bank functions such as monetary control and lender of last resort and leaving little room for discretionary monetary policy. Eg Hong Kong, Bulgaria, Brunei
Conventional Peg
The country formally (de jure) pegs its currency at a fixed rate to another currency or a basket of currencies, where the basket is formed, for example, the currencies of major trading or financial partners and weights reflect the geographic distribution of trade, services, or capital flows. The anchor currency or basket weights are publicly notified to the IMF. The country authorities stand ready to maintain the fixed parity through direct intervention (via exchange rate related use of interest rate policy, imposition of foreign exchange regulations etc). There is no commitment to irrevocably keep the parity, but formal arrangement must be confirmed empirically: the exchange rate may fluctuate within narrow margins of between +/-1 percent around the central rate - or the maximum and minimum value of the spot market exchange rate must remain within a narrow margin of 2% for at least six months. Eg Jordan, Saudi Arabia, Morocco , the Bahamas.
Balance of Payments
The statistical record of a country’s international transactions over a certain period of time presented in the form of double entry bookkeeping
What are the three types of Balance of Payments Accounts
Current Account
Capital Account
Official Reserve Account
Current Account
The export and import of goods and services
Capital Account
Purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses
Official Reserve Account
Purchases and sales of international reserve assets such as dollars, foreign exchanges, gold and special drawing rights (SDRs).
Capital Account Balance
Measures the difference between US sales of assets to foreigners and US purchases of foreign assets. US sales (or exports) of assets are recorded as credits, as they result in capital inflow.
US purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
Under the gold standard, how is a balance of payment disequilibrium corrected
By a counterflow of gold
