Understanding the International Monetary System

1. Understanding the International Monetary System Chapter 5

2. Current Trends • Post-WWII • Dollar’s value • Convertible currencies

3. Gold Standard History • The Gold Market • v. platinum v. diamond • Gold Standard • Currency per ounce of gold • Return to gold standard? • Why? • Why not?

4. Gold Standard History • Bretton Woods • Established IMF • Established World Bank • Established gold exchange standard • Decided stable exchange rates better • Dollar became central reserve asset

5. International Monetary Fund • Objective • Works with UN • Greater Power? • Film surveillance • Two methods • G-8 Countries • Conditionality and Cooperation with World Bank

6. World Bank • Multilateral development banks • Roles of developing and developed countries • World Bank • $16 billion in loans annually • Hard loans • Encourage investors

7. World Bank • International Finance Corporation • Investment banker • Favors joint ventures • Create local capital markets • International Development Association • Soft loans • Why?

8. World Bank • Multilateral Investment Guarantee • 152 countries • $30 billion in private investment in 70 developing countries • Capacity building and advisory services • International Center for Settlement of Investment Disputes • Advisory and research services • Problems with World Bank

9. World Bank • Other Multilateral Banks • African Development Bank • Disorganization • Lack of funds • Asian Development Bank • Lack of funds • European Bank for Reconstruction and Development • Who does it help?

10. World Bank • Other Multilateral Banks • Inter-American Development Bank • U.S. and 45 other countries • 1998- Lending is $10 billion

11. Bank for International Settlements • Location: Switzerland • Anonymous cover • Four functions • Forum for international monetary cooperation • Center for research • Banker for central banks • Agent for various financial arrangements • U.S. joined in 1994

12. Balance of Payments • Deficits- U.S. • Could be due to inflation • Market measures • Nonmarket measures

13. Balance of Payments • Current Account • Goods/merchandise • Services • Unilateral transfers • Capital Account • Direct investment • Portfolio investment • Short-term capital flows • Official Reserves Account

14. Balance of Payments • Temporary Disequilibrium • Monetary policies • Fiscal policies • Fundamental Disequilibrium

15. History of U.S. and Gold Standard • U.S. Dollar became over-valued • Why not de-value the currency? • Central banks • Gold Exchange Standard • $35/oz. of gold • Results • 1958-1971- U.S ran deficit • Dichotomy of the situation

16. History of U.S. and Gold Standard • August 1971 • December 1971 and February 1973 • Fixed currency exchange rates • Floating currency exchange rates • Types of Currency Floats • Free (clean) • Managed (dirty)

17. History of U.S. and Gold Standard • 1981-85 • U.S. runs a deficit • Why? • Sept. 1985 • Group of Five • Today- Group of Eight • Government reserves today

18. Currency Areas • Currencies are floating • Snake • Mid-1970’s • Europe • What was it? • Experience with Floating • Hard to peg • System today- has it held?

19. Forecasting Float Direction • Purchasing Power Parity • Big Mac Index • Starbucks Index

20. Money Markets and Foreign Exchanges • Money Markets • Which market is the largest? • Grew until 2001 • Why did it stop? • Asian currencies • Most traded currencies

21. SDRs • Special Drawing Rights • How is it calculated? • Uses • Remains stable • Holders • SDRs as central reserve assets • Replace currencies and gold? • Reasons

22. European Monetary System • European Monetary Union • 1979 • European Monetary Cooperation Fund • 1991- Maastricht • European Central Bank • European Currency Unit • Why did it work when SDR failed? • Euro • Transition to Euro • Circulation • European Central Bank • Powers