The international monetary system
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Transcript of The international monetary system
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International finance 120181-1165
The international monetary system
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International finance 120181-1165
Lecture outline
The notion and the functions of the IMS
Gold standard system
The gold bullion standard
The Bretton Woods system
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International finance 120181-1165
IMS definition
A set of rules, procedures, instruments and
institutions which are necessary to settle
international payments
Source: A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2006.
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International finance 120181-1165
The reasons for the creation of IMS
The necessity of international economic
cooperation
The efficiency of the international payment
system
Facilitation of international trade
Facilitation of international capital flow
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International finance 120181-1165
IMS functions
Ensuring international money supply
Ensuring international liquidity
Ensuring a global payment equilibrium
Creating a framework for the national economic
policy
Contributing to international economic
stabilisation
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International finance 120181-1165
International money
Unit of account
Medium of exchange
Store of value
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International finance 120181-1165
International money
L. Oręziak, Euro nowy pieniądz, PWN, Warszawa 2002.
Private transactions
Official transactions Function
Price quotation Reference currency Unit of account
Transaction currency Intervention currencyMedium of exchange
Investment currency Reserve currency Store of value
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International finance 120181-1165
International money
Criteria Large share in global exports
Credibility concerning the value of the currency
A well developed financial market
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International finance 120181-1165
International money
Main international currencies USD, EUR, JPY
Transaction function USD 84%, EUR 39%, JPY 19%
Reference function USD- 69 państw, EUR- 40 państw
Reserve currency USD 63,9% EUR 26,5%, GBP 4,7%
Source: BIS, IMF
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International finance 120181-1165
International liquidity
A stock of assets enabling settling international
payments
An appropriate level and quality of reserves
Reserves- assets held by the monetary
authority, which may serve to reinstate the
external equilibrium
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International finance 120181-1165
International liquidity
Reserves types Foreign currency
Gold
SDR (special drawing rights)
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International finance 120181-1165
Reserves structure (bln USD)
Source: IMF
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International finance 120181-1165
Global payment equilibrium
Tools enabling balance of payments
adjustments
Automatic mechanisms
Adjustment policy
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International finance 120181-1165
Global payment equilibrium
BP surplus China 296 bln USD, Germany 131 bln USD, Japan
110 bln USD
BP deficit USA, -380 bln USD, Spain -70 bln USD
Source: IMF
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International finance 120181-1165
Framework for the national economic policy
External and internal equlibrium
IMF
Measures to reinstate the BP equilibrium
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International finance 120181-1165
Stabilisation of the international economy
ER volatility
Various ER regimes
The role of reserves
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International finance 120181-1165
Currency convertibility
The legaly established possibility to
convert freely the national currency for any
foreign currency and vice versa at a single
ER
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International finance 120181-1165
Currency convertibility
Internal convertibility
External convertibility
Unlimited convertibility
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International finance 120181-1165
The gold standard
1870-1914
Creation of the world economy the necessity to create an IMS
The main goal- maintaining the external equilibrium
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International finance 120181-1165
The gold standard
Main rules:
Fixed ER at the level of the mutual gold parity of
two currencies
The amount of money in circulation strictly
depends on the stock of gold reserves
BP imbalances adjusted through gold flows
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International finance 120181-1165
The gold standard
The mechanism:
BP deficit
outflow of gold reserves
decrease of money supply
decrease of national prices
increase of exports, decrease of imports
BP equilibrium reinstated
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International finance 120181-1165
The gold standard
Fast BP adjustments +
Low ER volatility + Scarce set of measures enabling the reinstatement
equilibrium - The internal equilibrium subordinated to the external
eqilbrium -
Deficit countries bear the burden of adjustments -
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International finance 120181-1165
The gold bullion standard
1918-1939
No convertibilty of money to gold
Gold served the purpose of equilbrium
adjustments
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International finance 120181-1165
The gold bullion standard
Great depression 30-ties
Protectionism
Economic desintegration
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International finance 120181-1165
The Bretton Woods system
1944-1971
Endavour to reconcile the external and
internal equilibrium
IMF and World Bank
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International finance 120181-1165
The Bretton Woods system
Rules:
Fixed ER versus USD
Fixed price of gold in USD
Official foreign reserves- gold and USD
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International finance 120181-1165
The Bretton Woods system
IMF The possibility to adjust ER
Member quotas
Loans
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International finance 120181-1165
The Bretton Woods system
Currency convertibility
Liberalisation of capital flow
Growing economic integration
Speculative capital flows
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International finance 120181-1165
The Bretton Woods system
The problem of the US external
equilibrium
The necessity to hold large gold reserves
The credibility problem
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International finance 120181-1165
The Bretton Woods system
Fiscal expansion in the USA inflation
terms of trade deterioration BP
deterioration
Expansionary monetary policy of the FED
Speculation on USD depreciation
A two-level gold market
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International finance 120181-1165
The breakdown of the Bretton Woods system
1970- recession in the USA the
necessity to devalue USD
1971- suspension of USD convertibilty to
gold
Revaluation of the other currencies
The Smithonian agreement
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International finance 120181-1165
The breakdown of the Bretton Woods system
Intensive speculative attacks on USD
The necessity to close the currency
market
Floating ER
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International finance 120181-1165
The Bretton Woods system- an assessment
Stabilisation throughout 20 years
International money supply ensured
ER stability ensured
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International finance 120181-1165
The Bretton Woods system- an assessment
Insufficient international liquidity
The internal equilibrium subordinated to
the external eqilbrium
Changing economic environment
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International finance 120181-1165
After Bretton Woods
Floating ER- Kingston 1976
Expanded international liquidity
The foundations of the contemporary IMS
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International finance 120181-1165
Summing up
IMS functions
IMS evolution
The Bretton Woods system rules
The reasons for the breakdown of the
Bretton Woods system
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International finance 120181-1165
References
P. Krugman, M.Obstfeld, International economics: theory and
policy., Pearson, Addison Wesley, Boston 2009 E. Truman, The International Monetary System and Global
Imbalances, IMF conference paper 2010 P. Clark, J. Polak, International liquidity and the role of SDR in the
International Monetary System, IMF Working Paper, 2002 A. Kester, International reserves and foreign currency liquidity, IMF,
2001