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chapter 2: international textmonetary system - Coggle Diagram
chapter 2: international text
monetary system
fixed exchange rate
advantage
Stability encourages investment: the uncertainty of exchange rate fluctuations can reduce the incentive for firms to invest in export capacity
Keep inflation low: government who allow their exchange rate to devalue may cause inflationary pressures to occur
Avoid currency fluctuations: if the value of currencies fluctuates, significantly this can cause problems for firms in trade
Current account: a rapid appreciation in the exchange rate will badly affect manufacturing who expor
disadvantage
Less flexibility
join at the wrong rate
conflict with other macro economic objectives
repuire higher interest rates
Current account imbalances
difficulty in keeping the value of the currency
Encourage speculative attacks
Flexible exchange rate
the feature of a floating exchange rate is that this type of exchange rate will be changed completely depending on the supply and demand in the foreign currency market
Advantage
Helps move resources from places of low efficiency to places of higher efficiency
implementing the exchange rate regime is that it will help the central bank be more proactive in implementing economic policies
reflect the supply and demand policy of the foreign currency market and clearly show the fluctuations of this market
Disadvantage
the exchange rate is
make it difficult for economic policy making and investment
Bimetallism + Classical gold standard
bimetallism
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
advanced aganst
gresham's law
supporters
classical gold standard
there is two-way convertibility between gold and national currencies at a stable ratio
gold may be freely exported or imported
gold alone is assured of unrestricted coinage
the gold standard is a monetary system where a country's currency or paper has a value directly linked to gold
EUROPEAN MONETARY SYSTEM
Objectives
to establish a zone of monetary stability in europe
to pave the way for the eventual european monetary union
main instruments
ecu
the weights are based on each currency's relative GNP and share in intra-EU trade
the european currency unit
erm
the exchange rate mechanism ( ERM)
THE ERM is based on a parity grib system
the asian currency crisis
lessons
investors should beware of asset bubbles
the governments must keep track of spending
responding
in return, they are subject to strict conditions including higher taxes and interest rates, and reduced public spending
many of the affect countries began to show signs of recovery in 1999
about $110 billion in short-term loans were sent to thailand, indonesia and south korea to help stabilize their economics
define
the currency slump quickly spread across east asia. thus sending stock markets down, income from imports falling and government volatile
interwar period + bretton wood system
the inter war period: 1915 - 1944
other countries in europe also restored the gold standard by 1928
the great depression and the accompanying financial crisis also countributed to the collapse of the gold standard
with only mild inflation, thue usa was to lift restrictions on gold exports and return to a gold standard in 1919
as major countries began to cover from the war and stabilize their economics
bretton woods system
in july 1994. representatives of 44 countries gathered in brehon woods to discuss and design a postwar international monetary
the flexble exchange rate regime
the flexble exchange rate regime that followed the demise of the bretton woods system was ratified after the fact in january 1976
the jamaica agreement include
half of the IMF's gold holdings were returned to the members and the other half were sold
non-oil-exporting countries and less-developed countries were given grater access to IMF funds
gold was officially abandined
the decline of the dollar between 1970-1973 represents more volatile that they were under the bretton woods system
rise and decline of the dollar
the value of the dollar reached its peak in february 1985 and then began a persistent downward drift until it stabilized in 1988
the us dollar experienced a major apprectiation
1996 present
2001: began to depreciate due to a shrp stock market correction
the technological boom caused the dollar to generally appreciated
the current exchange rate arrangemnets
currency board
no separate legal tender
conventional peg
stabilised arrangement
crawling peg
the mexican peso crisis
reason
the country currency has been overcalued ralative to it;s true value
mexico has attracted huge amounts of foreign investment and for this very reason has made mexico worse off
solution
financial currency adjustment
advances in structural reform and market liberrazation
emergency assistance financial package
the argentine peso crisis
. 1. foreign influence
asian economic crisis 1997-1998
mexico devalued the peso in 1994
political instability
the argentine congress chooses eduardo duhalde as the new president
president who has just been elected by the argentine congress, announces the default on usd
fiscal mismanagement
argentina's fiscal policies also contributed ti the crisis
the effects of de la rua's policy were however the opposite
the current exchange rate arrangements
crawl-like arrangement
pegged exchange rate within horizontal bands
free floating
refers to a company's stock that can be publicly traded and unrestricted
used to describe the ratio between the volume of freely transferable shares of the total number of shares outstanding in the market
other managed arrangement
this category is a residual and is used when an exchange rate arrangement does to meet the criteria for any other type.
floating
determined based on the supply-demand relationship in the foreign exchange market
the benefits of monetary union
transaction expenses are reduced
exchange rate uncertainty is no longer an issue
enhanced european economy efficiency and competitiveness
europe's political cooperation and peace
brief history of the euro currency
the european economic community was established in 1958
the euro was introduced on january 1, 1999
over the years 8 more countries joined the club
the first 10 year of the euro were marked by the currency establishing and enlargement. the second decade was largely overshadowed by the crisis
emergency measures were introduced, include the creation of the european stability mechanism
seven remaining EU states will be required to join the euro area once they meet the convergence criteria