Chap010 - Chapter The International Monetary system 10...

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Unformatted text preview: Chapter The International Monetary system 10 Turkeys 18 th IMF program Large and inefficient state sector heavy subsidies Government debt risen to 60% of gross domestic product Rampant inflation IMF focus Reduce inflation Stabilize value o f currency Privatization Reduction of subsidies Government reforms Reasons for failure International monetary system (IMF) The institutional arrangements that countries adopt to govern exchange rates Dollar, Euro, Yen and Pound float against each other Floating exchange rate: Foreign exchange market determines the relative value of a currency International monetary system (IMF) Some countries use other institutional arrangements to fix their currencys value Pegged exchange rate Value fixed relative to a reference currency Dirty float Hold value within range of a reference currency Fixed exchange rate Set of currencies are fixed against each other at some mutually agreed upon exchange rate The gold standard Roots in old mercantile trade. Inconvenient to ship gold, changed to paper- redeemable for gold. Want to achieve balance-of-trade equilibrium USA Japan G o l d T r a d e Balance of trade equilibrium Trade Surplus Gold Increased money supply = price inflation. Decreased money supply = price decline. As prices decline, exports increase and trade goes into equilibrium . Between the wars Post WWI, war heavy expenditures affected the value of dollars against gold US raised dollars to gold from $20.67 to $35 per ounce Dollar worth less? Other countries followed suit and devalued their currencies Bretton Woods In 1944, 44 countries met in New Hampshire Countries agreed to peg their currencies to US$ which was convertible to gold at $35/oz. Agreed not to engage in competitive devaluations for trade purposes and defend their currencies Weak currencies could be devalued up to 10% w/o approval IMF and World Bank created Role of the IMF Created to police monetary system by ensuring maintenance of the fixed-exchange rate Promote intl monetary cooperation and facilitate growth of intl trade Wanted to avoid problems following WW1, through A) Discipline Maintaining a fixed exchange rate imposes monetary discipline, curtails inflation Brake on competitive devaluations and stability to the world trade environment , Role of the IMF...
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This note was uploaded on 09/08/2011 for the course MGNT 3650 taught by Professor Grimes during the Spring '11 term at Georgia Southwestern.

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Chap010 - Chapter The International Monetary system 10...

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