International Monetary Systme - Global Monetary.ppt
- 1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
- 2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER The Global Monetary System 9
- 3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Issues • How does the Global Monetary System affect exchange rates? • How did the current system evolve? • What are the differences between the fixed and floating exchange system? • What is the role of the International Monetary Fund and the World Bank in the Global Monetary System? • What are the implications of the global monetary system for currency management and business strategy?
- 4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Monetary System • Currency exchange rates depend on the structure of the international monetary system • Generally they are not freely convertible and do not float freely – Only 51 were freely convertible in 1997 – Another 50 were pegged to the exchange rate of major currencies such as the US Dollar and the French Franc or to baskets of other currencies – Another 45 currencies were allowed by their governments to float within a range of another currency – This is 146 of 188 UN member nations in 1999 Slide 9-1
- 5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Evolution of the International Monetary System • Gold Standard – Currencies pegged to the value of gold; convertibility guaranteed – By 1880 most countries were on the gold standard – Achieves balance of trade equilibrium for all countries (value of exports equals value of imports); flow of gold was used to make up differences – Abandoned in 1914; attempt to resume after WWI failed with Great Depression • Bretton Woods (1944) Slide 9-2
- 6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Bretton Woods (1944 - 1973) • 44 countries met to design a new system in 1944 • Established International Monetary Fund (IMF) and World Bank – IMF maintained order in monetary system – World Bank promoted general economic development – Fixed exchange rates pegged to the US Dollar – US Dollar pegged to gold at $35 per ounce – Countries maintained their currencies ± 1% of the fixed rate; government had to buy/sell their currency to maintain level Slide 9-3
- 7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Role of the IMF per Bretton Woods • Exchange rate discipline – National governments had to manage inflation through their money supply • Exchange rate flexibility – Provided loans to help members states with temporary balance-of-payment deficit; • Allowed time to bring down inflation • Relieved pressures to devalue – Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies – Allowed up to 10% devaluations and more with IMF approval Slide 9-4
- 8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Role of the World Bank • World Bank (IBRD-International Bank for Reconstruction and Development) role – Refinance post-WWII reconstruction and development – Provide low-interest long term loans to developing economies • The International Development Agency (IDA), an arm of the bank created in 1960 – Raises funds from member states – Loans only to poorest countries – 50 year repayment at 1% per year interest Slide 9-5
- 9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Collapse of Bretton Woods • Devaluation pressures on US dollar after 20 years – Lyndon Johnson policies • Vietnam war financing • Welfare program financing – Nixon ended gold convertibility of US dollar in 1971 – US dollar was devalued and dealers started speculating against it for further devaluation – Bretton Woods fixed exchange rates abandoned in January 1972 Slide 9-6
- 10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Jamaica Agreement 1976 • Floating rates declared acceptable • Gold abandoned as reserve asset; – IMF returned its gold reserves to its members at current prices – Proceeds were placed in a trust fund to help poor nations – IMF quotas – member country contributions – increased; membership now 182 countries – Less-develop, non-oil exporting countries given more access to IMF • IMF continued its role of helping countries cope with macroeconomic and exchange rate problems Slide 9-7
- 11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Case for Floating Exchange Rates – Monetary policy autonomy – Trade balance adjustments helped The Case for Fixed Exchange Rates – Monetary discipline – Speculation limited – Uncertainty reduced – Trade balance adjustment effects on inflation controlled Who is right? Slide 9-8
- 12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Recent Activities and the IMF • Mexican crisis 1995 • Russian crisis1995 • Asian crisis 1997/1998 – The investment boom – Excess capacity – The debt bomb – Expanding imports – The crisis Slide 9-9 • How did the IMF do? – Inappropriate policies? – Moral hazard • Reckless behavior • No consequences – Lack of accountability • Record mixed
- 13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Implications for Business • Currency management – The monetary system is not perfect – Both speculative activity and government intervention affect the system – Companies must use risk management instruments • Business strategy – Minimize risk by placing assets in different parts of the world, e.g., production – Contract manufacturing – Manage company-government relations Slide 9-11