The InternationalMonetarv SvstemChapter one
ChapterObjective:This chapter serves to introduce thestudentto theinstitutional frameworkwithin which:International payments are made.The movement of capital is accommodated Exchange rates are determined
Chapter Objective: ❖This chapter serves to introduce the student to the institutional framework within which: ▪ International payments are made. ▪ The movement of capital is accommodated. ▪ Exchange rates are determined
Chapter OutlineEvolutionof the International MonetarySystemCurrent Exchange Rate ArrangementsEuroandthe EuropeanMonetaryUnionFixed versus Flexible Exchange RateRegimes
❖Evolution of the International Monetary System ❖Current Exchange Rate Arrangements ❖Euro and the European Monetary Union ❖Fixed versus Flexible Exchange Rate Regimes Chapter Outline
Evolutionof theInternational Monetary SystemBimetallism:Before 1875ClassicalGold Standard:1875-1914lnterwar Period: 1915-1944BrettonWoodsSystem:1945-1972The Experience of the FloatingExchange Rates, 1973-Present
Evolution of the International Monetary System ❖Bimetallism: Before 1875 ❖Classical Gold Standard: 1875-1914 ❖Interwar Period: 1915-1944 ❖Bretton Woods System: 1945-1972 ❖The Experience of the Floating Exchange Rates, 1973-Present
Bimetallism:Before1875*A"double standard" in the sense that both gold andsilver were used as money.Some countries were on the gold standard, some onthe silver standard, some on both.Both gold and silver were used as internationalmeans of payment and the exchange rates amongcurrencies were determinedby eithertheirgold orsilver contents.Gresham'sLawimpliedthat itwould be theleastvaluable metalthat wouldtendtocirculate
Bimetallism: Before 1875 ❖A “double standard” in the sense that both gold and silver were used as money. ❖Some countries were on the gold standard, some on the silver standard, some on both. ❖Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. ❖Gresham’s Law implied that it would be the least valuable metal that would tend to circulate
ClassicalGoldStandard:1875-1914*During this period in most major countries:Gold alone was assured of unrestrictedcoinageThere was two-way convertibility betweengold and national currencies at a stableratio. Gold could be freely exported or importedThe exchange rate between two country'scurrencies would be determined by theirrelativegoldcontents
Classical Gold Standard: 1875-1914 ❖During this period in most major countries: ▪ Gold alone was assured of unrestricted coinage ▪ There was two-way convertibility between gold and national currencies at a stable ratio. ▪ Gold could be freely exported or imported. ❖The exchange rate between two country’s currencies would be determined by their relative gold contents
ClassicalGoldStandard:1875-1914For example, if the dollar is pegged togold at U.S.$30 = 1 ounce of gold, andthe British pound is pegged to gold at6 = 1 ounce of gold, it must be thecase that the exchange rate isdetermined by the relative goldcontents:$30 = 6$5 = 1
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: Classical Gold Standard: 1875-1914 $30 = £6 $5 = £1
Classical Gold Standard:1875-1914Misalignment of exchange rates were correctedbycross-border flows of gold.International imbalances ofpaymentwereautomaticallycorrectedbytheprice-specie-flowmechanism.Highlystableexchangerates undertheclassicalgold standard provided an environment that wasconducive to international trade and investment
Classical Gold Standard: 1875-1914 ❖Misalignment of exchange rates were corrected by cross-border flows of gold. ❖International imbalances of payment were automatically corrected by the price-specie-flow mechanism. ❖Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment
Price Specie-Flow Mechanism (Hume David)MoneyGoldExportlevelPricedeficitoutflosupplyincrease,decreaseInternatWimportdecreasdecreaseionaleimbalanExportsurplusGoldPriceMoneycedecreasinflolevele,correctesupplyWimportincreasedincreaseincreaseRL
Price Specie-Flow Mechanism (Hume David) deficit Gold outflo w Money supply decreas e Price level decrease Export increase, import decrease surplus Gold inflo w Money supply increase Price level increase Export decreas e, import increase Internat ional imbalan ce correcte d
ClassicalGoldStandard:1875-1914There are shortcomings: The supply of newly minted gold is sorestricted that the growth of world tradeand investment can be hampered for thelack of sufficient monetary reserves. Even if the world returned to a goldstandard, any national government couldabandon the standard
Classical Gold Standard: 1875-1914 ❖There are shortcomings: ▪ The supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves. ▪ Even if the world returned to a gold standard, any national government could abandon the standard