UNIVERSITY OF LJUBLJANA

FACULTY OF ECONOMICS

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

CONTENTS AND PURPOSE

1. Basic Elements of the International Monetary System 2. Mechanisms for Establishing a Consistent International Monetary System

purpose:
podati konceptualne osnove, ki so potrebne za prouevanje mednarodnega denarnega sistema

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

1. Basic Elements of the International Monetary System

International monetary system = system of rules, mechanism and institutions that connects the national monetary systems into a consistent whole Role of the international monetary system:
ensure exchange rate stability facilitate balance-of-payments disequilibria correction ensure access to international liquidity

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

1. Basic Elements of the International Monetary System

solutions for the acceleration of the size of the international goods and capital flows? distribution of the benefits from these flows?

balance-of-payments adjustments international liquidity facilitation consistency of the system and confidence
International Finance Mojmir Mrak
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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

Balance-of-Payments Adjustments
balance-of-payments disequilibria elimination process

long-run equilibrium in the current account! neoclassical view and realistic circumstances in the world economy:
validity of the automatic elimination of the balance-of-payments disequlibria assumption? analysis of the balance-of-payments disequilibrium emergence? difference in different groups of economic agents?
International Finance Mojmir Mrak
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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

International Liquidity Facilitation

definition of international liquidity two segments:
international liquidity under the ownership of the central bank

foreign exchange reserves of the CB gold

unused gold tranche at the IMF

Special Drawing Rights (SDR)

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

International Liquidity Facilitation

international liquidity under the ownership of all other agents in the economy:
operative foreign exchange reserves of commercial banks foreign exchange assets of non-banking subjects abroad short-term foreign assets of the residents long-term, prenosljive foreign bonds of the residents possibilities of the banks to get credits for financing balance-of-payments deficit abroad

sources of financial assets to increase IMR:

privatni sources of capital public sources of capital
International Finance Mojmir Mrak
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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

Consistency of the System and Confidence

relevance of the mechanism for the elimination of balanceof-payments disequilibria appropriateness of the size of the international liquidity n-1 countries can decide independently on their balance-ofpayments balance: establishment of a
n-th country accepts the balance that is determined by all the other countries in the system
International Finance Mojmir Mrak
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mechanism for the coordination of the balance-of-payments goals

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

2. Mechanisms for Establishing a Consistent International Monetary System

automatic adjustment mechanism international coordination system
International Finance Mojmir Mrak

n-1 system

monetary union system

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

Automatic Adjustment Mechanism

changing the level of foreign exchange supply and demand:
flexible exchange rate:

deficit domestic currency depreciation D for & S of foreign exchange balance-of-payments equilibrium
International Finance Mojmir Mrak
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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

Automatic Adjustment Mechanism

fixed exchange rate:
through price changes through changes in aggregate expenditures
Marginal propensity to import Fall in aggregate expenditures Balance-ofpayments deficit Fall in supply of money Multiplier Decreased imports Decrease in GDP Decrease in domestic demand Increased exports Decrease in the deficit

Lower rate of inflation

Improved competitiveness relative to other countries

Decreased imports Price elasticities Increased exports

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

n-1 System
n-th country currency (N-currency) is convertible into a widely accepted good at a fixed price, the currencies of all other countries are related to it in a fixed relationship no automatism! countries must accept and implement economic policy measures for balance-of-payments adjustments
Countries with a surplus are under significantly lower pressure to adjust their balance-of-payments!

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

countries with a balance-of-payments deficit carry a relatively higher cost burden N-country must accept whatever net balance-of-payments position is dictated by the group of n-1 countries in the system:
strong and a fairly closed economy at the same time N-currency must be stable

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

International Coordination System

economic policy coordination of the world economic forces & exchange rate movement coordination crucial: exchange rate regime choice reasons for balance-of-payments disequilibrium:
external shocks weak or no accordance in the economic policy of individual countries flexible exchange rate easier reaction to asymmetric shocks & more possibilities for independent economic policy

International Finance Mojmir Mrak

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UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS

Monetary Union
countries completely give up their national monetary policy and surrender it to some above-national institution

common currency becomes the only legal tender in all monetary union member countries
International Finance Mojmir Mrak
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