Please enable JavaScript.

Coggle requires JavaScript to display documents.

Chap 2: International Monetary System, The Current Exchange Rate…

- - - - Labor market inflexibility.
      - Contagion from the financial crises in Russia and Brazil.
      - The lack of fiscal discipline.
    - - As world economic growth in the early 2000s was strong and Argentine producers benefitted from the strong depreciation of the currency, the Argentine economy was able to recover rather quickly.
  - - - The country's currency has been overvalued relative to its true value.
      - Mexico has attracted huge amounts of foreign investment, and for this very reason has made Mexico worse off.
      - 1994: Due to macroeconomic management problems, the exchange rate has been fixed for a long time
    - - Financial currency adjustment
      - Emergency assistance financial package
      - Advances in structural reform and market liberalization
- - - - It is difficult to know the right rate to join at. If the rate is too high, it will make exports uncompetitive
    - - In a fixed exchange rate, it is difficult to respond to temporary shocks
    - - Fixed exchange rates can lead to current account imbalances
    - - To maintain a fixed level of the exchange rate may conflict with other macroeconomic objectives.
    - - If a currency is falling below its band the government will have to intervene. It can do this by buying sterling but this is only a short-term measure
    - - Some argue a fixed exchange rate would encourage stability and therefore there is no point investors ‘speculating against the currency’
  - - - The uncertainty of exchange rate fluctuations can reduce the incentive for firms to invest in export capacity
    - - Governments who allow their exchange rate to devalue may cause inflationary pressures to occur
    - - If the value of currencies fluctuates, significantly this can cause problems for firms engaged in trade.
    - - A rapid appreciation in the exchange rate will badly affect manufacturing firms who export; this may also cause a worsening of the current account
- - - - Investing
      - Working on an online platform.
      - Paying commission to a broker
    - - Economic integration brings the benefits of greater size, internal efficiency and robustness to the EU economy as a whole and to the economies of the individual Member States.
    - - The monetary union has made the EU the third largest economy in the world in nominal terms, after the United States and China, and third in terms of purchasing power parity (PPP), after China and the United States.
- - - - Freed from war time pegging, exchange rates among currencies were fluctuating in the early 1920s
      - USA was able to lift restrictions on gold exports and return to a gold standard in 1919.
      - [World War I ended the classical gold standard in August 1914, as major countries such as Great Britain, France, Germany and Russia suspended redemption of bank notes in gold and imposed embargoes on gold exports.
      - In summary, the inter war period was characterized by economic nationalism, half hearted attempts and failures to restore the gold standard, economic and political instabilities, bank failures and panicky flights of capital across boarders.
    - - The IMF then created an artificial international reserve called the SAR in 1970
      - In July 1994, representatives of 44 nations gathered at BreHon Wooods, New Hansphire, to discuss and design the postwar international monetary system
      - This agreement was then ratified to launch the IMF in 1945
  - - - Advantage
        
        A fixed exchange rate to the gold standard reduces the risk of fluctuations in the prices of imports and exports between countries and promotes international trade.
        Under the gold standard, international imbalances of payment will also be corrected automatically.
        
        It creates certainty in international trade by providing a fixed pattern of exchange rates.
        
        It limits inflation due to the limited supply of gold
      - Definition
        
        The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold
      - Disadvantages
        
        The gold standard can cause imbalances among the participating countries
        
        It may not provide sufficient flexibility in the supply of money.
    - - Define
        
        The international monetary system before the 1870s can be characterized as “bimetallism” in the sense that both gold and silver were used as international means of payment and that the exchange rates among currencies were determined by either their gold or silver contents.
      - Supporters of bimetallism offer three arguments for it
        
        Greater price stability will result from the larger monetary base
        
        Greater ease in the determination and stabilization of exchange rates among countries using gold, silver, or bimetallic standards will result.
        
        The combination of two metals can provide greater monetary reserves
      - Arguments advanced against bimetallism are:
        
        Because price stability is dependent on more than the type of monetary base, bimetallism does not provide greater stability of prices.
        
        Such a system is wasteful in that the mining, handling, and coinage of two metals is more costly.
        
        It is practically impossible for a single nation to use such a standard without having international cooperation;
  - - - The Jamaica Agreement include:
      - Gold was officially abandoned (i.e., demonetized) as an international reserve asset
      - January 1976 The flexible exchange rate regime that followed the demise of the Bretton Woods system
    - - • Since March 1973, exchange rates have become substantially more volatile than they were under the Bretton Woods system
      - • The decline of the dollar between 1970 and 1973 represents the transition from the Bretton Woods to the flexible exchange rate system.
      - The IMF continued to provide assistance to countries facing balance of payments and exchange rate difficulties
    - - • Rise: The US Dollar experienced a major appreciation throughout the first half of the 1980s
      - Decline and stabilization: The value of the dollar reached its peak in February 1985 and then began a persistent downward drift until it stabilized in 1988.
      - • 1980: The Reagan administration ushered in a period of growing U.S. budget deficits and balance of payments deficits.
    - - • 2001: began to depreciate due to a sharp stock market correction, the ballooning trade deficits, and the increased political uncertainty
      - • 2010: began to appreciate, reflecting the recovery of the U.S. economy from the effect of the Great Recession.
      - • The technological boom caused the dollar to generally appreciated