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International Monetary System (Financial Revolution and Monetary Affairs …
International Monetary System
Postwar International Monetary System
1944 - early 1970s
fixed exchange rates
domesticpolicy autonomy
intl. monetary stability
fixed or pegged exchange rates
sufficient flexibility
reliable reserve credit
$35 per ounce in gold
IMF
Bretton Woods
The End of Fixed Exchange Rates
↑ global rate of inflation threat value of $
early 1970s
Vietnam War
Great Society Program
Jamaica Conference (1976) → instituted
flexible rates
:red_cross: $ for gold
Financial Revolution and Monetary Affairs
(mid-1970s)
unstable exchange rates & irresponsible American macroeconomic policies
Europe isolates from US actions
ERM
EMS
Intl. financial flows important determinant of exchange rates
Economic interdependence
↓ macroeconomic policy autonomy
International economic system
New Protectionism
IMS creation and/or reform
Issues
political
technical
adjustment
liquidity
credibility
Devising an International Monetary System
trilemma
trade-offs
fixed exchange rates
national independence in monetary policy
capital mobility
different national situations and interests → no trilemma solution
fixed vs. flexible exchange rates
Arguments for More Stable Exchange Rates
Arguments for Flexible Exchange Rates
threat to unity of IMS
EMS & €
dollarization
LDC tie currency closely to $/$ as its currency
stabilize its currency & exchange rate
dampen inflation
reassure investors
FOR
#
reduction of transaction costs & uncertainty
stabilize & protect from market instabilities weak LDCs currencies
enforces LDCs fiscal and monetary discipline
reduces monetary uncertainty
reduce currency speculation & financial crisis
AGAINST
#
exchange rate appreciation
or depreciation as a shock absorber