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The international monetary system

The international monetary system. Lecture outline. The notion and the functions of the IMS Gold standard system The gold bullion standard The Bretton Woods system. IMS definition. A set of rules, procedures, instruments and institutions which are necessary to settle international payments

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The international monetary system

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  1. The international monetary system International finance 120181-1165

  2. Lecture outline • The notion and the functions of the IMS • Gold standard system • The gold bullion standard • The Bretton Woods system International finance 120181-1165

  3. IMS definition • A set of rules, procedures, instruments and institutions which are necessary to settle international payments Source: A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2006. International finance 120181-1165

  4. The reasons for the creation of IMS • The necessity of international economic cooperation • The efficiency of the international payment system • Facilitation of international trade • Facilitation of international capital flow International finance 120181-1165

  5. IMS functions • Ensuring international money supply • Ensuring international liquidity • Ensuring a global payment equilibrium • Creating a framework for the national economic policy • Contributing to international economic stabilisation International finance 120181-1165

  6. International money • Unit of account • Medium of exchange • Store of value International finance 120181-1165

  7. International money L. Oręziak, Euro nowy pieniądz, PWN, Warszawa 2002. International finance 120181-1165

  8. International money • Criteria • Large share in global exports • Credibility concerning the value of the currency • A well developed financial market International finance 120181-1165

  9. International money • Main international currencies • USD, EUR, JPY • Transaction function • USD 84%, EUR 39%, JPY 19% • Reference function • USD- 69 państw, EUR- 40 państw • Reserve currency • USD 63,9% EUR 26,5%, GBP 4,7% Source: BIS, IMF International finance 120181-1165

  10. International liquidity • A stock of assets enabling settling international payments • An appropriate level and quality of reserves • Reserves- assets held by the monetary authority, which may serve to reinstate the external equilibrium International finance 120181-1165

  11. International liquidity • Reserves types • Foreign currency • Gold • SDR (special drawing rights) International finance 120181-1165

  12. Reserves structure (bln USD) Source: IMF International finance 120181-1165

  13. Global payment equilibrium • Tools enabling balance of payments adjustments • Automatic mechanisms • Adjustment policy International finance 120181-1165

  14. Global payment equilibrium • BP surplus • China 296 bln USD, Germany 131 bln USD, Japan 110 bln USD • BP deficit • USA, -380 bln USD, Spain -70 bln USD Source: IMF International finance 120181-1165

  15. Framework for the national economic policy • External and internal equlibrium • IMF • Measures to reinstate the BP equilibrium International finance 120181-1165

  16. Stabilisation of the international economy • ER volatility • Various ER regimes • The role of reserves International finance 120181-1165

  17. Currency convertibility • The legaly established possibility to convert freely the national currencyfor any foreign currency and vice versa at a single ER International finance 120181-1165

  18. Currency convertibility • Internal convertibility • External convertibility • Unlimited convertibility International finance 120181-1165

  19. The gold standard • 1870-1914 • Creation of the world economy the necessity to create an IMS • The main goal- maintaining the external equilibrium International finance 120181-1165

  20. The gold standard Main rules: • Fixed ER at the level of the mutual gold parity of two currencies • The amount of money in circulation strictly depends on the stock of gold reserves • BP imbalances adjusted through gold flows International finance 120181-1165

  21. The gold standard The mechanism: • BP deficit • outflow of gold reserves • decrease of money supply • decrease of national prices  • increase of exports, decrease of imports • BP equilibrium reinstated International finance 120181-1165

  22. The gold standard • Fast BP adjustments + • Low ER volatility + • Scarce set of measures enabling the reinstatement equilibrium - • The internal equilibrium subordinated to the external eqilbrium - • Deficit countries bear the burden of adjustments - International finance 120181-1165

  23. The gold bullion standard • 1918-1939 • No convertibilty of money to gold • Gold served the purpose of equilbrium adjustments International finance 120181-1165

  24. The gold bullion standard • Great depression 30-ties • Protectionism • Economic desintegration International finance 120181-1165

  25. The Bretton Woods system • 1944-1971 • Endavour to reconcile the external and internal equilibrium • IMF and World Bank International finance 120181-1165

  26. The Bretton Woods system Rules: • Fixed ER versus USD • Fixed price of gold in USD • Official foreign reserves- gold and USD International finance 120181-1165

  27. The Bretton Woods system • IMF • The possibility to adjust ER • Member quotas • Loans International finance 120181-1165

  28. The Bretton Woods system • Currency convertibility • Liberalisation of capital flow • Growing economic integration • Speculative capital flows International finance 120181-1165

  29. The Bretton Woods system • The problem of the US external equilibrium • The necessity to hold large gold reserves • The credibility problem International finance 120181-1165

  30. The Bretton Woods system • Fiscal expansion in the USA  inflation terms of trade deterioration BP deterioration • Expansionary monetary policy of the FED • Speculation on USD depreciation • A two-level gold market International finance 120181-1165

  31. The breakdown of the Bretton Woods system • 1970- recession in the USA  the necessity to devalue USD • 1971- suspension of USD convertibilty to gold • Revaluation of the other currencies • The Smithonian agreement International finance 120181-1165

  32. The breakdown of the Bretton Woods system • Intensive speculative attacks on USD • The necessity to close the currency market • Floating ER International finance 120181-1165

  33. The Bretton Woods system- an assessment • Stabilisation throughout 20 years • International money supply ensured • ER stability ensured International finance 120181-1165

  34. The Bretton Woods system- an assessment • Insufficient international liquidity • The internal equilibrium subordinated to the external eqilbrium • Changing economic environment International finance 120181-1165

  35. After Bretton Woods • Floating ER- Kingston 1976 • Expanded international liquidity • The foundations of the contemporary IMS International finance 120181-1165

  36. Summing up • IMS functions • IMS evolution • The Bretton Woods system rules • The reasons for the breakdown of the Bretton Woods system International finance 120181-1165

  37. References • P. Krugman, M.Obstfeld, International economics: theory and policy., Pearson, Addison Wesley, Boston2009 • E. Truman, The International Monetary System and Global Imbalances, IMF conference paper 2010 • P. Clark, J. Polak, International liquidity and the role of SDR in the International Monetary System, IMF Working Paper, 2002 • A. Kester, International reserves and foreign currency liquidity, IMF, 2001 International finance 120181-1165

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