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International Monetary System
International Monetary System
ALTERNATIVE EXCHANGE RATE SYSTEMS A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM THE EUROPEAN MONETARY SYSTEM Costs and benefits of a single currency
There are an enormous number of exchange rate systems, but generally they can be sorted into one of these categories
Freely Floating Managed Float Target Zone Fixed Rate
Important Note:
Even though we may call it free float in fact the government can still control the exchange rate by manipulating the factors that affect the exchange rate (i.e., monetary policy)
Under a floating rate system, exchange rates are set by demand and supply.
price levels interest rates economic growth
Fixed Rate System: Government maintains target rates and if rates threatened, central banks buy/sell currency. A fixed rate system is the ultimate good news bad news joke. The good is very good and the bad is very bad.
Advantage: stability and predictability Disadvantage: the country loses control of monetary policy (note that monetary policy can always be used to control an exchange rate). Disadvantage: At some point a fixed rate may become unsupportable and one country may devalue. (Argentina is the most dramatic recent example.) As an alternative to devaluation, the country may impose currency controls.
Interwar Period
Periods of serious chaos such as German hyperinflation and the use of exchange rates as a way to gain trade advantage. Britain and US adopt a kind of gold standard (but tried to prevent the species adjustment mechanism from working).
British pound
French franc
U.S. dollar
Pegged at $35/oz.
Gold