Intl monetary system ch. 10

Intl monetary system ch. 10

• 1.
  Monetary System
• 2.
  Monetary System  Relationship between monetary system and foreign exchange rates  Historical development  Fixed vs floating exchange rates  Role of the IMF and World Bank  Implications for managers
• 3.
  International Monetary System  Currency exchange rates depend on the structure of the international monetary system  In 2003 of all IMF members currencies – Only 19% were free floating – 25% were managed float – 8% were adjustable peg – 22% were fixed peg – 4% were fixed by a currency board – 22% were not currency of their own (use Euro, US Dollar)
• 5.
  Evolution of theInternational Monetary System  Gold Standard: currencies pegged to gold value – Convertibility guaranteed – By 1880 most on gold standard – Balance of trade equilibrium for all countries  Value of exports should equal value of imports  Flow of gold used to make up differences – Abandoned in 1914  Failed resumption after WWI  Great Depression
• 6.
  Bretton Woods (1944- 1973)  44 countries met to design a new system in 1944  Established: International Monetary Fund (IMF) and World Bank – IMF: maintain order in monetary system – World Bank: promote 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; buy/sell own currency to maintain level
• 7.
  The Role ofthe IMF  IMF maintained exchange rate – discipline  National governments had to manage inflation through their money supply – flexibility  Provides loans to help members states with temporary balance-of-payment deficit; – Allows time to bring down inflation – Relieves pressures to devalue  Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies – Allowed to 10% devaluations and more with IMF approval  187 members by 2003
• 8.
  The Role ofthe World Bank  World Bank (IBRD) role (International Bank for Reconstruction & Development) – Refinanced post-WWII reconstruction and development – Provides 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
• 9.
  Collapse of BrettonWoods  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
• 10.
  Jamaica Agreement 1976 Floatingratesdeclared acceptable Gold abandoned as reserve asset; – IMF returned gold reserves to members at current prices – Proceeds placed in 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
• 11.
  Case for FloatingExchange 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?
• 12.
  Recent Activities andthe IMF  Mexican Crisis 1995  Russian Ruble crisis1995  Asian crisis 1997/1998 – Events  The investment boom  Excess capacity  The debt bomb  Expanding imports  The crisis  How does the IMF achieve results? – Inappropriate policies? – Moral Hazard? – Lack of accountability?
• 13.
  Managerial Implications  Currency management – Currency market does not always work as expected – Government intervention – Speculative activity  Business strategy – Movements in exchange rates are difficult to predict – Forward market is imperfect predictor of exchange rate movements – Forward exchange rate market covers risk for months not years – Maintenance of strategic flexibility required  Disperse manufacturing  Outsource – Corporate-government relations