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
5-3

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)
5-4

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.
5-6

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

5-7

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

5-8

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
5-9

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

5-10

Euro

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

5-11

BOP Accounts Table 5.1
• Current account
– Records a country’s 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 nation’s 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 country’s foreign currency
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Table 5.1 U.S. International Transactions (millions of dollars)

5-14

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

5-15

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