ECON5319-Lecture04-2011

ECON5319-Lecture04-2011 - The Global Economy ECON 5319...

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The Global Economy ECON 5319 International Monetary Arrangements, 1879-Present William J. Crowder Ph.D.
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Overview • International Monetary Arrangements in Theory and Practice – The Bimetallic Standard 1550-1860 – The International Gold Standard, 1879-1913 – The Interwar Period 1917-1939 – The Bretton Woods Arrangement, 1944-1973 – The Floating-Rate Dollar Standard, 1973-1984 – The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard, 1985-1999 – The Current Mixed-Policy Regime 2000-Present
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International Monetary Arrangements in Theory and Practice • The international monetary system is the institutional framework within which: • International payments are made. • Movements of capital are accommodated. • Exchange rates among currencies are determined.
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The Bimetallic Standard • The Mercantilists 1550-1770 • A nation’s stock of precious metals constituted its wealth. • The accumulation of specie through international trade. • Export promotion/Import restriction. • Money stimulates the economy. • Inflation is driven by cost factors not money creation.
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The International Gold Standard, 1879-1913 • Countries unilaterally elected to follow the rules of the gold standard system, which lasted until the outbreak of World War I in 1914, when European governments ceased to allow their currencies to be convertible either into gold or other currencies. Fix an official gold price or “mint parity” and allow free convertibility between domestic money and gold at that price.
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The dollar was pegged to gold at U.S. $20.67 = 1 ounce of gold. The British pound was pegged to gold at £4.26 = 1 ounce of gold. It must be the case that the exchange rate is determined by the relative gold contents: The International Gold Standard, 1879-1913 $20.67 = £4.26 $4.85 = £1
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• Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment. – Low exchange rate risk made goods and asset trade more attractive. – Other barriers to trade were reduced. • Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism. The International Gold Standard, 1879-1913
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• The Gold Standard “Rules of the Game – Central banks • Their primary responsibility was to preserve the official parity between their currency and gold. – Many governments took a laissez-faire attitude toward the current account (trade balance). – The practice of selling (or buying) domestic assets in the face of a deficit (or surplus). • The efficiency of the automatic adjustment processes inherent in the gold standard increased by these rules. • In practice, there was little incentive for countries with expanding gold reserves to follow these rules.
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ECON5319-Lecture04-2011 - The Global Economy ECON 5319...

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