Please enable JavaScript.

Coggle requires JavaScript to display documents.

International Monetary System image, Flexible exchange rate regime:…

- - - - stabilize the world economy
      - balance payments
      - limit risks
      - disadvantages to the economy.
  - - - at least 1% around a set central rate
      - the highest and minimum value of the exchange rate is greater than 2%
  - - - to be classified as a crawl-like arrangement
    - - change is at least 1%
  - - - Examples: Honduras and Nicaragua
- - - - The international monetary
        system before the 1870s
        
        SILVER & GOLD
        
        Used as international means of payment and that the exchange rates among currencies were determined
    - - (1) The combination of two metals can provide greater monetary reserves
      - (2) Greater price stability will result from the larger monetary base
      - (3) greater ease in the determination and stabilization of exchange rates among countries using gold, silver, or bimetallic standards will result
    - - (1) It is practically impossible for a single nation to use such a standard without having international cooperation
      - (2) Such a system is wasteful in that the mining, handling, and coinage of two metals is more costly.
      - (3) Because price stability is dependent on more than the type of monetary base, bimetallism does not provide greater stability of prices.
    - - a monetary principle stating that
        "bad money drives out good"
      - applied to the relative stability of
        different currencies' value in global markets.
  - - - A monetary system
        where a country's currency
        or paper money has a
        value directly linked to gold.
      - The gold standard
        
        Gold alone is assured of unrestricted coinage
        
        Gold may be freely exported or imported
        
        There is two-way convertibility between gold and national currencies at a stable ratio
    - - It limits inflation due to the limited supply of gold.
      - It creates certainty in international trade by providing a fixed pattern of exchange rates
      - Under the gold standard, international imbalances of payment will also be corrected automatically.
    - - It may not provide sufficient flexibility in the supply of money
      - The gold standard can cause imbalances among the participating countries
      - the gold standard could also impact economic downturns
  - - - Ended the classical gold standard in August 1914
      - Countries widely used “predatory” depreciations of their currencies
    - - US restores gold standard in1919
      - Other countries in Europe also restored the gold standard by 1928.
    - - Characterized by economic nationalism
      - Half hearted attempts and failures to restore the gold standard
      - Economic and political instabilities
      - Bank failures
      - Panicky flights of capital across borders
  - - - In July 1994, representatives of 44 nations gathered at Bretton Woods
        
        Purpose
        
        Creating an efficient foreign exchange system
        
        Preventing competitive devaluations of currencies
        
        Promoting international economic growth
        
        Important organizations
        
        189 member countries and still continues to
        support global monetary cooperation
        
        Monitor exchange rates and Identify nations
        that needed global monetary support
        
        Established to manage funds available for providing assistance to countries that had been physically and financially devastated by World War II.
        
        Helps to promote these efforts through
        its loans and grants to governments
      - It wasn't until 1958 that the Bretton Woods System became fully functional.
        
        The U.S. dollar to be pegged to the value of gold.
        
        Benefits of Bretton Woods Currency Pegging
        
        Help regulate and promote international trade across borders
        
        A fixed peg against the U.S. dollar with diversions of only 1% allowed.
        
        Minimized international currency exchange rate volatility which helped international trade relations
      - Collapse stage: 1970
        
        “Triffin Paradox”
        
        In the early 1960s, under the fixed exchange rate regime of the Bretton Woods system, the fixed value of the dollar was considered overvalued relative to gold.
        
        The decline in US gold reserves was accompanied by deficits due to the desire to maintain balance for the whole world, threatening the stability of the Bretton Woods system.
        
        In the early 1970s, the economies of Western European countries grew faster than the US economy, the US balance of payments overspended and the dollar depreciated continuously.
        
        The Bretton Woods system has limited spending activities of the United States and the world
        
        1 more item...
  - - - Advantages
        
        Avoid currency fluctuations
        
        Stability encourages investment
        
        Keep inflation low
        
        Current account
      - Disadvantages
        
        Conflict with other
        macroeconomic objectives
        
        Less flexibility.
        
        Join at the wrong rate
        
        Require higher interest rates.
        
        Current account imbalances
        
        1 more item...
    - - Advantages
        
        Make the market more transparent and efficient
        
        Balance resources between of low-high efficiency
        
        Making monetary policy more independent.
        
        Help to balance the balance of payments.
      - Disadvantages
        
        Constantly fluctuating exchange rates
        
        Difficult for economic policy making &investments.
        
        Affected by future forecasts
- - - - 1990s, Argentina’s hard currency peg to the US Dollar
        
        Outbreak of a severe currency, sovereign debt and banking crisis
      - Pro-cyclical fiscal policies and extensive foreign borrowing left the country unable to deal with a number of economic shocks
    - - Foreign influence
      - Fiscal mismanagement
      - Political instability
  - - - economic crisis that was sparked by the rapid devaluation of the Mexican peso
        
        Mexican economy wobble
        
        Negatively affected the economies of other Latin American countries
    - - Mexican peso is pegged to the US dollar
        
        peso appreciating against the dollar
        
        Current account deficit
  - - - Series of currency devaluations and other events that began in the summer of 1997 and spread through many Asian markets
        
        Currency market failed for the first time in Thailand due to no longer peg the local currency to the US dollar
        
        Stock markets down
        
        Income from imports falling
        
        Governments volatile
        
        Respond
        
        IMF intervened, providing loans to stabilize the Asian economy
        
        Countries began to show signs of recovery
      - Cause
        
        Several themes of industrial, financial and monetary phenomena
        
        Explicit and implicit government guarantees to guarantee domestic industries and banks
        
        Encouraging large investments in marginal projects. and many potential risks
        
        cozy relationship between East Asian corporations, financial institutions and regulators
        
        Leaching of foreign financial flows with little attention to potential risks
        
        Reversal of the Plaza Accord in 1995
        
        Appreciation of East Asian currencies was pegged to the US dollar
        
        Large financial pressures
    - - Investors should beware of asset bubbles
      - Major overlays have to keep an eye on spending
- - - - “basket” currency constructed as a weighted average of the currencies of member countries of EU
      - Primary form is security called an ECU
      - Initial value is established as a one-to-one guarantee between the ECU and the Euro
      - Weights are based on each currency’s relative GNP and share in intra-EU trade
        
        (1) The monetary components of the ECU are determined by the European monetary system.
        
        (2) Spot rates of European currencies to 1 US dollar as of December 8, 1944.
        
        (3) The US Dollar value of each currency is calculated in column (1)/column (2). The ECU's Dollar value is the sum of the values of its component currencies in US Dollars.
        
        (4) Spot rate per 1 ECU calculated by multiplying column (2) by the ECU value in US Dollars.
        
        (5) The weight is calculated by dividing the values calculated in column (3) by the ECU value in US Dollars
    - - The procedure by which EMS member countries collectively manage their exchange rate
      - Based on a “parity grid” (vạch ngang giá xuất kinh tế) system
      - “The par values in the parity grid” are computed by first defining the par values of EMS currencies in terms of the ECU
      - 1979 - the EMS was launched
        
        1993: the band was widened to a maximum of plus or minus 15 percent
        
        EMS members were less than fully committed to coordinating their economic policies
      - A chronology of the EU
        
        1999: the euro, was adopted
        
        2001 to now: Greece was the first country to adopt the euro and then a series of countries in the EU
        
        Member countries of the EMS agreed to closely coordinate their fiscal, monetary, and exchange rate policies and achieve “a convergence” of their economies
  - - - EMS was created in 1979
      - 1999, the European Monetary Union (EMU) was created
      - 2002, euro coins and notes came to circulation and national currencies were gradually withdrawn
      - First 10 years of the euro were marked by the currency establishing and enlargement
      - Second decade was overshadowed by the crisis
      - creation of the European Stability Mechanism
    - - Transaction expenses are reduced
      - Exchange rate uncertainty is no longer an issue
      - Enhanced European economy efficiency and competitiveness
      - Conditions favourable to the establishment of continental capital markets with comparable depth and liquidity to those in the United States.
      - Europe's political cooperation and peace
    - - Loss of national monetary and exchange rate policy independence.
      - A country is more prone to asymmetric shocks the less diversified and more trade-dependent its economy is.
      - Monetary union will become a costly venture.
      - Theory of optimum currency areas
    - - Will the euro survive and succeed in the long run?
        
        Requires wage, price, and fiscal flexibility
        
        must choose between exchange-rate stability and an independent monetary policy
      - Will the euro become a global currency rivaling the U.S. dollar?
        
        Roughly comparable to the United States in terms of population size, GDP, and international trade share.
- - - - The Jamaica Agreement
        
        The flexible exchange rate regime has been agreed to a new set of rules for the international monetary system.
        
        Gold was officially abandoned (i.e., demonetized) as an international reserve asset.
        
        Non-oil-exporting countries and less-developed countries were given greater access to IMF funds
- - - - Plaza Agreement:
        
        It would be desirable for the dollar to depreciate against most major currencies to solve the U.S. trade deficit problem
      - Louvre accord
        
        The managed-float system which intervene in the exchange market to correct over-or undervaluation of currencies