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LEC VII - International Monetary System

LEC VII - International Monetary System - International...

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Unformatted text preview: International Monetary System System Past, Present & Future. Past, Present & Future. International Monetary System System The Int'l Monetary System/regime refers to the rules, customs, instruments, facilities and organizations for effecting international monetary transactions. The main objectives are Easy Adjustments to disequilibria Liquidity to settle temporary disequilibria Confidence in the institutions. Past: The Gold Standard Past (1880-1914). . X-rate was fixed and was based on gold content of currency. The gold standard said that the amount of gold/unit of currency had to be fixed => fixed exchange rates between currencies. This fixed e-rate was called the mint parity. The nation facing deficit would export gold (rather than depreciate currency) and a surplus nation would import gold. Since money supply was attached to gold stock - gold flows would lead to price levels in deficit nation falling (leading to greater X and lesser M) and surplus nation increasing (leading to lesser X and greater M) bringing BOP into equilibrium. Even though some are nostalgic, research has shown that this period was not as ideal as some believe. Past: The Interwar Chaos (1919Past The 1944): 1944): Inflation, wild fluctuations, lack of confidence, beggar-thy-neighbor x-rate and commercial policies & the great depression were characteristic of this period which included floating x-rates. Past: The Bretton Woods Era (1944-1971): (1944-1971): Gold and the $ were the denominations used Gold for international transactions. Gold was fixed at $35/ounce and the other currencies were pegged to the $ on an adjustable basis. The IMF was set up to help countries get over temporary issues. But successive deficits in U.S BOP led to expected $ depreciation-->run on U.S Gold--->on Aug 15, 1971 Nixon suspended convertibility of $. suspended Present: Present: Managed Floating Rate System (1973-present): Countries allowed to choose their own x-rate system. Governments and Central Banks are expected to dampen flux in x-rates by "leaning against the wind". eg; buy $ if $ is depreciating in forex markets, sell $ if it is appreciating in forex markets. IMF continues to help countries take care of BOP problems. But most of its help has now shifted to developing countries. During B-W, help was mostly to developed economies. Also, nature of help is shifting to medium-term from short-term. Issues for the Future Issues [a] Excessive Volatility in x-rates: The expansion of international capital markets has added significantly to flux. [b] Chronic Current Account disequilibria: Continuing deficits and surplus for a decade and more in the Current account has led to political problems between deficit and surplus countries. [c] Lack of Macroeconomic Policy Coordination has added to the volatility. But Govts use macro-policies for Internal Issues which lead to increasing conflicts internationally. eg; High interest rates in Germany in 1991after reunification added to unemployment in Europe. [d] Potential for Developing Countries to face debt and repayment problems (a la 1980s and 1990s) and its potential impact on the world economy is a continued threat. [e] Eastern Europe and the Ex-Soviet Union have still not been stably integrated into the int'l monetary system. The future of the IMF/World Bank Bank Left wing critics assert that their structural­ adjustment and stabilization policies based on the [right­wing] “Washington consensus” has exacerbated problems in developing countries. Right­wing critics that in developing countries these organizations have promoted ‘moral hazard’ and that they have ignored corruption and institutional failures ...
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