ch2 - The International Monetary System 2 Chapter Two...

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1 The International Monetary System Chapter Objective: This chapter serves to introduce the student to the institutional framework within which: (1) International payments are made, (2) The movement of capital is accommodated, (3) Exchange rates are determined. Chapter Outline Evolution of the International Monetary System Current Exchange Rate Arrangements European Monetary System Euro and the European Monetary Union The Mexican Peso Crisis The Asian Currency Crisis Fixed versus Flexible Exchange Rate Regimes 2 Chapter Two
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2 Evolution of the International Monetary System Definition: IMS is institutional framework within which international payments are made, movements of capital are accommodated, and exchange rates among currencies are determined Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973-Present
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3 Evolution of the International Monetary System Bimetallism (prior to 1875) Gold and Silver used as international means of payment and the exchange rate among currencies was determined by either their gold or silver content. Gresham’s law - exchange ratio between two metals was officially fixed, therefore only more abundant metal was used, driving the more scarce metal out of circulation
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4 Evolution of the International Monetary System (contd.) Classic Gold Standard (1876 - 1913) During this period in most major countries: 1. gold alone is assured of unrestricted coinage 2. two-way convertibility between gold and national currencies at a stable ratio 3. gold is freely exported or imported The exchange rate between two country’s currencies would be determined by their relative gold contents Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment. Price-specie-flow mechanism corrected misalignment of exchange rates and international imbalances of payment
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5 Evolution of the International Monetary System (contd.) Interwar period (1915 – 1944) characterized by: Economic nationalism Attempts and failure to restore gold standard Economic and political instability These factors highlighted some of the shortcomings of the gold standard The result for international trade and investment was profoundly detrimental.
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6 Evolution of the International Monetary System (contd.) Bretton Woods System (1944 – 1973) Creation of the International Monetary Fund (IMF) and the World Bank
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ch2 - The International Monetary System 2 Chapter Two...

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