Lecture 5 international monetary system and exchange rate arrangements…
Lecture 5 international monetary system and exchange rate arrangements
the history of exchange rate arrangements
The classical gold standard
a fixed exchange rate system
Each country's central bank fixed the price of gold in terms of their domestic currency and agreed to buy or sell any amount of gold at that price
This established a fixed exchange rate between
any two currencies called the mint parity
The exchange rate could vary above and below the mint parity within certain limits called the gold points.
These limits related to the cost of shipping gold between the two countries.
Each country had to hold sufficient gold to back its currency as any surplus or deficit capital position (BOP) between countries was then offset by gold.
As a country s local currency supply was tied to its gold holdings, the flow of gold from the deficit country to the surplus country caused a monetary contraction in the deficit country. In contrast, the gold inflow into the surplus country
caused a monetary expansion.
These price specie changes in the quantity of money would cause the deficit country to experience deflation and inflation in the surplus country. These price changes would eventually correct their BOPs.
The collapse of the gold standard
The gold standard worked roughly from 1876 to 1913, but collapsed in 1914 as the warring countries suspended the convertibility of their currencies and prohibited the export of gold
When the French decided not to hold pounds and rather exchange them into gold, the British were forced to make their pound inconvertible and the gold standard effectively ceased operations in 1931.
Why gold standard failed
Pre war gold FX rates set across the participating countries proved inappropriate given the wide difference in their national inflation rates考虑到各国通胀率的巨大差异，战前各国设定的黄金汇率被证明是不合适的
The standard was suppose to address inflation differences, but the prices of goods and wages proved too rigid and did not respond as planned.该标准原本是为了解决通胀差异，但事实证明，商品和工资的价格过于僵化，没有按照计划做出反应。
Worst still, politicians were unwilling to let their country suffer. Governments instead tried to sterilize the impact of any major BOP imbalances and so avoid the domestic instability that would be needed to correct these differences.更糟糕的是，政客们不愿让他们的国家受苦。相反，各国政府试图消除任何主要国际收支失衡的影响，从而避免纠正这些差异所需的国内不稳定。
International Monetary Fund (IMF) 1944
Intl. Bank for Reconstruction & Development (known as
the World Bank) 1948
Other international post WWII bodies
The International Trade Organisation (ITO) was also proposed but not agreed. In 1948 the General Agreement on Tariffs and Trade (GATT) was signed instead. It was replaced by the World Trade Organisation (WTO) in 1995
United National (UN) 1949
The Bretton Woods agreement (1946-73) was designed
to expand international trade
to contribute to monetary stability
to promote international capital flows
It did so by restoring a version of the gold standard based on the gold convertibility of the US dollar
It also created the World Bank and International Monetary Fund (IMF) to assist in this process.
US dollar was pegged to gold and other countries the pegged their currencies to USD.
As the USA had over half of the world's manufacturing capacity and most of the gold, they agreed the US dollar should be convertible at the price of $35 per ounce
Unlike the old standard, this one allowed the actual rates to fluctuate within 1 % of this value.
If the FX rate moved beyond this 1 %, the country s central bank had to intervene by buying or selling the domestic currency for US dollar
These transactions would affect the official reserves.
If the reserves decline too much, the country would not be able to maintain its parity value and so the currency would be devalued
Problems with Bretton Woods
The adjustable peg system lacked the stability, certainty and automaticity of the gold standard, as well as the flexibility of a pure floating system可调挂钩系统缺乏金本位制的稳定性、确定性和自动性，也缺乏纯浮动系统的灵活性
National governments had to prove a fundamental disequilibrium before they change their FX rate各国政府在改变汇率之前，必须证明存在根本性的失衡
The delays entailed caused further problems
both internally and for other countries.所造成的拖延在国内和对其他国家造成了进一步的问题。
Problems with speculators
Countries with currency problems could have their rates further de-stabilised through speculation.有汇率问题的国家可以通过投机来进一步稳定利率。
Once identified as weak, speculators would sell the currency placing further downward pressure. As the only solution was a devaluation, there would be few buyers and the outcome was relatively certain.一旦被认定为弱势货币，投机者就会抛售货币，从而带来进一步的下行压力。由于唯一的解决办法是货币贬值，买家将会很少，结果也相对确定。
This worked for both devaluations and
Problems with liquidity
The system also lacked means of liquidity support
Special Drawing Rights
support Bretton Woods liquidity requirements and so curb financial crises
The SDRs, however, proved of only limited use as a reserve asset. Instead, their main function is to serve as a unit of account for the IMF and some other international organisations
neither a currency, nor a claim
it is a potential claim on the freely usable currencies of the IMF member countries
The value of an SDR was initially defined as equivalent to 0.888671 grams of fine gold (which, at the time, was also equivalent to one U.S. dollar).
End of the US dollar link
External and domestic pressures caused the USA to suspend official purchases or sales of gold in 1971 and so broke convertibility.
Exchange rates of most leading countries were allowed to float (upwards) against the dollar
In 1971, the Smithsonian Agreement was signed to reintroduce some stability. But by early 1973, a fixed rate system no longer feasible and the dollar, along with the other major currencies commenced to float
FX rate arrangements today
1976年的《牙买加协定The Jamaica Accord》给予各国自由选择它们认为适合其经济appropriate for their economies的外汇安排FX arrangements。
Besides variations of fixed and floating, countries use the currency of another country to circulate locally as their de facto legal tender除了固定货币和浮动货币之外，各国还使用另一个国家的货币在当地流通，作为它们事实上的法定货币
其他国家则加入了一个或多个货币联盟joined a monetary or currency union，在该联盟中，同一法定货币 same legal tender由联盟成员共享
the Australian exchange rate arrangements
Until December 1971
pegged to the pound
Until September 1974
pegged to the US dollar
Until December 1983
pegged to a basket of currencies
international monetary systems
The international monetary system is the framework of rules, regulations and conventions that govern the financial relations among countries. It is effectively how countries settle their debts with each other.
governmental agreements among countries and international public institutions
represented by the banking and finance industry
Classification by reserve assets
Pure fiat standards纯粹法律标准
Its value is function of the
government legalising it as legal tender.
reserves consist of fiat currency as well as commodities, most notably gold.
Pure commodity standards
the currency has value in its own right
(like a gold coin)
Market determined FX rates
currencies appreciate when demand exceeds supply and depreciate when supply exceeds demand
The government would have no direct involvement
categories according to the FX rate’s flexibility
The range of foreign currency regimes范围
Fixed FX rates
fixed by the central bank or government, not allowed to deviate
It helps provide in international price stability in trade
inherently anti inflationary, requiring the country to follow restrictive monetary and fiscal policies
require significant international reserves for the occasional defence of fixed rate
once in place, may become inconsistent with economic fundamentals
entail significant economic costs and eventually major revaluations or devaluations
Fixed Peg arrangements
A fixed exchange rate is typically set against another foreign currency or a basket of currencies like the IMF s Special Drawing Rights (SDRs) or the country s major trading partners typically with less than a 1 per cent variation
A currency board arrangement is a variant of a fixed peg. The country legislates that all FX transactions be conducted at the fixed rate.
Flexible FX rates
Arguments in favour
Smoother adjustment of BOP to external factors
Gains from freer trade
Independent fiscal & monetary policy
Forward markets can provide FX cover
Increased uncertainty about foreign trade & investment
Encourages more destabilising speculation
Inappropriate for small economies
Increased potential for inflation
Mis‐allocation of resources
Fixed and crawling pegs
With a crawling peg, the FX rate is fixed but revised periodically based on recent economic activity such as inflation在爬行钉住汇率制下，汇率是固定的，但会根据近期的经济活动(如通胀)定期修正
Dual FX rates
operates with two FX regimes
A commercial (fixed) rate is used for imports and exports
A financial (flexible) rate is used for trading in financial assets
This system tries to insulate commercial transactions from speculative capital flows.
Managed floating rate
a mix between fixed and flexible FX rate regime
It generally operates as flexible, but the central bank may intervenes to limit the frequency and amplitude of exchange rate fluctuations
It is adopted because countries want their currencies neither too strong (because of the adverse effect on the competitive position of the economy) nor too weak (because of rising import prices).
Fixed but adjustable
Countries fix their exchange rate as before but standby to alter these values in response to economic problems
These devaluations and revaluations are justified as being used to correct some economic fundamentals such as with the BOP
Fixed peg but flexible within a band
With a fixed exchange rate that is flexible within a band, an upper and lower limits defined by a band around the par value固定汇率在一定范围内是灵活的，上限和下限由一个围绕票面价值的区间确定
Central bank intervention is required to keep
the exchange rate within these limits or band.
This band is at least 1% + or ‐
Other countries’ currency
Some countries do not issue their own currency,
but use that of another as legal tender
international financial organizations
The International Monetary Fund (IMF)
It provides surveillance and advice of members' exchange rate policies, financial assistance, and technical support.它为成员国的汇率政策、财政援助和技术支持提供监督和咨询
It evaluates its members FX rate polices and meets with them twice yearly
police (or at least monitor) country behaviour under the Bretton Woods Agreement under a goal of international monetary cooperation
每个人都必须根据国家的经济状况提供报价，然后用25%的黄金和75%的当地货币支付相应的认购费pay a subscription。
IMF loan conditionality
They often attempt to address both an immediate foreign exchange crisis and a longer term imbalance in the current account.它们往往试图同时解决眼前的外汇危机和经常账户的长期失衡。
Conditionality may come as a function of prior actions before funding can be obtained, quantitative performance criteria, indicative targets, and structural benchmarks
The IMF today
provides its members with
research, statistics, forecasts, and analysis
technical assistance and training
The member shareholders voting rights depend on their quota
The IMF annual meetings are major economic
Smooth adjustment to disruptive economic adjustment or sovereign default
Help unlock financing from other lenders
Prevent crisis and avoid their substantial economic costs
does some other lending to its poorer members
It now provides a similar development role for developing countries throughout the world through the provision of long term loan funds and technical assistance.
The World Bank Group
it raises the bulk of its funds through long term debt issues
Its lends on its cost of funds plus a small margin (0.27 to 1.00%) to its developing member country governments.
The loans are also for much longer periods
The IDA provides “soft loans” to its poorest members
European monetary system
Benefits to trade and capital markets
For the system to work well, countries should be similar but the EU members (particularly the new ones) are not
Individual countries have to give up national interest and exchange rate policies