Lecture_02_2007

Lecture_02_2007 - International Finance FINA 5331 Lecture...

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International Finance FINA 5331 Lecture 2: International Monetary Arrangements, 1879-Present William J. Crowder Ph.D.
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Overview International Monetary Arrangements in Theory and Practice The International Gold Standard, 1879-1913 The Spirit of the Bretton Woods Agreement, 1945 The Fixed-Rate Dollar Standard, 1950-1970 The Floating-Rate Dollar Standard, 1973-1984 The Plaza-Louvre Intervention Accords and the Floating-Rate Dollar Standard, 1985-1999
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Overview International Monetary Arrangements in Theory and Practice …continued The Spirit of the European Monetary System, 1979 The European Monetary System as a “Greater DM” Area, 1979-1998 The Spirit of the European Economic and Monetary Union, 1999
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Overview Recent Behavior of Prices in International Financial Markets Exchange Rate Developments Interest Rate Developments Policy Matters - Private Enterprises The Conduct of Business under Pegged and Floating Exchange Rates Greater Exchange Rate Variability under Floating Costs of Exchange Rate Variability
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Overview Policy Matters - Public Policymakers Exchange Rate Policies in Emerging Markets Currency Boards to Full Dollarization Concerns About EMU
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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 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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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: The International Gold Standard, 1879-1913 $30 = £6 $5 = £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. 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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Price-Specie-Flow Mechanism Suppose Great Britain exported more to France than France imported from Great Britain. This cannot persist under a gold standard. Net export of goods from Great Britain to France will be
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Lecture_02_2007 - International Finance FINA 5331 Lecture...

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