chapter five

Understanding the International Monetary System

McGraw-Hill/Irwin International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Explain the functioning of the gold standard Describe the purposes of the IMF Appreciate the accomplishments of Bretton Woods system and the ensuing developments shaping the world monetary system Describe the purpose of the World Banks Discuss the purpose of the Bank for International Settlements
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Learning Objectives
Discuss the floating exchange rate system Describe the development of the euro Explain the role of the Balance of Payments (BOP) Discuss the major BOP accounts Explain the use of Special Drawing Rights (SDRs)
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Gold Standard
Gold Standard
The use of gold at an established number of units per currency

Bretton Woods
The New Hampshire town where treasury and central bank representatives met near the end of World War II to establish the IMF, the World Bank, and the gold exchange standard
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International Monetary Fund

International Monetary Fund (IMF)
Institution that coordinates multilateral monetary rules and their enforcement

Triffin paradox
The concept that a national currency that is also a reserve currency will eventually run a deficit, which eventually inspires a lack of confidence in the reserve currency and leads to a financial crisis.
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World Bank
World Bank
Institution that focuses on funding of development projects

Bank for International Settlements

Institution that is the central bank for central bankers

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Currency Exchange Rate Systems

Fixed currency exchange rates
Rates that governments agree on and undertake to maintain

Floating currency exchanges rates

Rates that are allowed to float against other currencies and are determined by market forces

Jamaica Agreement
The 1976 IMF agreement that allows flexible exchange rates among members

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Current Currency Exchange Rate Arrangements

Exchange arrangements with no separate legal tender Currency board arrangements Other conventional fixed peg arrangements Pegged exchange rates within horizontal bands
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Current Currency Exchange Rate Arrangements

Crawling pegs Exchange rates within crawling bands Managed floating with no preannounced path for the exchange rate Independently floating exchange rates

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Euro

Currency of the European Union 12 EU members have joined the European Monetary Union

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BOP Accounts Table 5.1

Current account
Records a countrys exports and imports in goods and services Goods or merchandise account Services account Unilateral transfers

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BOP Accounts
Capital account
Records the net changes in a nations international financial assets and liabilities Direct investments Portfolio Investments Short-term capital flows

Official Reserves account

Records the assets held by the government; gold, foreign currencies, and accounts in foreign banks; a balance of the countrys foreign currency
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Table 5.1 U.S. International Transactions (millions of dollars)

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Special Drawing Rights

Special Drawing Rights (SDR)

An international reserve asset established by the IMF The unit of account for the IMF and other international organizations

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