© McGraw Hill Companies, Inc., 2000 The International Monetary System Chapter 10.
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Transcript of © McGraw Hill Companies, Inc., 2000 The International Monetary System Chapter 10.
The Gold Standard Roots in old mercantile trade. Inconvenient to ship gold, changed to paper -
redeemable for gold. Want to achieve ‘balance-of-trade equilibrium
Japan USA
Trade
Gold© McGraw Hill Companies, Inc., 2000
10-1
© McGraw Hill Companies, Inc., 2000
Between the Wars
Post WWI, war heavy expenditures affected the value of dollars against gold
US raised dollars to gold from $20.67 to $35 per ounce.
Dollar worth less?
Other countries followed suit and devalued their currencies.
10-2
Bretton Woods
In 1944, 44 countries met in New Hampshire Countries agreed to peg their currencies to US$
which was convertible to gold at $35/oz. Agreed not to engage in competitive devaluations
for trade purposes and defend their currencies. Weak currencies could be devalued up to 10%
w/o approval. IMF and World Bank created.
© McGraw Hill Companies, Inc., 2000 10-3
IMF Created to police monetary system by ensuring
maintenance of the fixed-exchange rate. Promote int’l monetary cooperation and facilitate
growth of int’l trade. Wanted to avoid prewar problems, so
Created lending facilities to help countries with trade deficits.
• Persistent borrowings leads to IMF control of a country’s economic policy.
Created adjustable parities.© McGraw Hill Companies, Inc., 2000 10-5
Principal Duties
Surveillance of exchange rate policies. (No longer fixed rate exchange.)
Financial assistance (including credits and loans) Technical assistance (expertise in
fiscal/monetary policy).
© McGraw Hill Companies, Inc., 2000 10-6
Sources of Funds
182 nations pay into fund according to the size of their economy.
Funds remain their property. Borrower repays loan in 1 to 5 years, with
interest. No nation has ever defaulted; some are
given extensions.
© McGraw Hill Companies, Inc., 2000 10-7
Membership in the IMF
Open to any country willing to agree to its rules and regulations.
Must pay a deposit (quota) Quota size reflects global importance of a
nation’s economy. Quota determines voting powers.
© McGraw Hill Companies, Inc., 2000 10-8
Largest Contributors
18.3
5.7 5.7 5.1 5.1
0
5
10
15
20
US Germany Japan Britain France
USGermanyJapanBritainFrance
© McGraw Hill Companies, Inc., 2000 10-9
Largest Borrowers
4
11 11.6
21
0
5
10
15
20
25
Thailand Russia Indonesia S. Korea
ThailandRussiaIndonesiaS. Korea
© McGraw Hill Companies, Inc., 2000 10-10
$ Billion
(International Bank for Reconstruction and Development)
Created to fund EUROPE’s reconstruction and help 3d world countries.
Overshadowed by Marshall Plan, so bank looked to 3d world.
Looked at public sector projects. Country borrows money raised by
WB bond sales. International Development Agency created to
help poorest countries.
© McGraw Hill Companies, Inc., 200010-11
What Happened After Bretton Woods?
Under BW, US required to deliver 1oz of gold to any IMF member that gave US Treasury $35.00.
1958 -1971 US ran accumulated deficit of $56 billion.
US gold reserves shrank from $34.8 billion to $12.2 billion.
Liabilities to foreign central banks increased from $13.6 billion to $62.2 billion.
© McGraw Hill Companies, Inc., 2000 10-12
Collapse of the Fixed Exchange System
August 8, 1971, Nixon left gold standard? March 19, 1972, Japan and most of Europe
floated their currencies. Fully collapsed in 1973.
LBJ policies and Vietnam.
Floating currencies considered to be a temporary fix. Still going on today.
© McGraw Hill Companies, Inc., 2000 10-13
US Dollar Movements
90
100
110
120
130
140
150
160
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994
1990=100
Oil CrisisDesert Storm
Recession Ends
© McGraw Hill Companies, Inc., 2000 10-14
Floating Exchange Rates
Jamaica Agreement, 1976. Floating rates acceptable.
Based primarily on supply/demand. Managed float involves gov’t
manipulation in currency markets.
Gold abandoned as reserve asset. IMF quotas increased, now $180B
© McGraw Hill Companies, Inc., 2000
10-15
Managed Currency Floats
1985: ‘Group of 5’ met at Plaza Hotel in NY and agreed on ‘right’ level for US dollar.
G5 became G7 (now G8). Seeks to stabilize exchange rates.
Difficult due to growth of Fx market. Annual volume up from $18 billion in 1979 to
$1.5 trillion today.
© McGraw Hill Companies, Inc., 2000 10-16
Floating
Monetary policy autonomy Trade balance adjustments.
© McGraw Hill Companies, Inc., 2000
10-17
Fixed
Monetary discipline. Speculation. Uncertainty. Trade balance adjustments.
© McGraw Hill Companies, Inc., 2000 10-18
© McGraw Hill Companies, Inc., 2000
Exchange Rate Regimes Pegged Exchange Rates.
Peg own currency to a major currency ($). Popular among smaller nations. Evidence of moderation of inflation.
Currency Boards. Country commits to converting domestic currency on
demand into another currency at a fixed exchange rate.
Country holds foreign currency reserves equal to 100% of domestic currency issued.
10-19
© McGraw Hill Companies, Inc., 2000
How IMF Members Determine Exchange Values
0
5
10
15
20
25
30
35
40
45
50 Peg to $
Peg to FFr
Pegged to OtherCurrencyMovement Related toOther CurrencyFree Float
Managed Float
Other
Inflexible
Somewhat Flexible
Flexible
10-20
Figure 10.2
© McGraw Hill Companies, Inc., 2000
Post-Bretton Woods Financial Crises
Currency crises: when a speculative attack on a currency’s exchange value
results in a sharp depreciation of the currency’s value or forces authorities to defend the currency.
Banking crises: Loss of confidence in the banking system leading to a run on
the banks.
Foreign debt crises: When a country cannot service its foreign debt obligations.
10-21
© McGraw Hill Companies, Inc., 2000
Crises Have Common Underlying Causes
Common causes: High inflation Widening current account deficit Excessive expansion of domestic borrowing Asset price inflation
10-22
© McGraw Hill Companies, Inc., 2000
Incidence of Currency Crises1975-1997
00.050.1
0.150.2
0.250.3
0.350.4
0.450.5
1975 77 79 81 83 85 87 89 91 93 95 97
Industrial
Emerging Market
Number of Currency Crises per Country
10-23Figure 10.3a
© McGraw Hill Companies, Inc., 2000
Incidence of Banking Crises 1975-1997
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
75 77 79 81 83 85 87 89 91 93 95 97
Industrial
Emerging Market
Number of Banking Crises per Country
10-24Figure 10.3b
© McGraw Hill Companies, Inc., 2000
Mexican Currency Crises of 1995
Peso pegged to U.S. dollar. Mexican producer prices rise by 45% without
corresponding exchange rate adjustment. Investments continued ($64B between 1990 -
1994. Speculators began selling pesos and government
lacked foreign currency reserves to defend it. IMF stepped in.
10-25
© McGraw Hill Companies, Inc., 2000
Peso Movements
0
20
40
60
80
100
120
140
160
Inde
x =
100
Mexico
10-26
94 95
© McGraw Hill Companies, Inc., 2000
Problems in Asian Market Economies
Cronyism. Too much money, dependence on
speculative capital inflows. Lack of transparency in the financial sector. Currencies tied to strengthening dollar. Increasing current account deficits. Weakness in the Japanese economy
10-27
© McGraw Hill Companies, Inc., 2000
0 10 20 30 40 50 60
Apparel
Toys
TV & VCR
Motor Vehicles
Appliances199819971996
%
Impact of the Asian Financial Crisis onUS Imports
10-28
© McGraw Hill Companies, Inc., 2000
Devalued Currency
0
20
40
60
80
100
120
Inde
x =
100
ThailandIndonesiaS. Korea
1997 1998
10-29
© McGraw Hill Companies, Inc., 2000
Russia
Financial markets loss of confidence in Russia’s ability to meet national and international payments. Led to loss of international reserves and roll
over of treasury bills reaching maturity.
Financial markets unable to determine ‘who’s in charge’.
10-30
© McGraw Hill Companies, Inc., 2000
Government ActionsExacerbating the Situation
Defacto devaluation of the ruble. Unilateral restructuring of ruble-
denominated public debt. 90-day moratorium on foreign credits
repayment. Hike in interest rates to defend ruble. Duma rejects measures designed to alleviate
problems.
10-31
© McGraw Hill Companies, Inc., 2000
Russia
0
5
10
15
20
25
30
Dec-97
Feb-98 Apr Jun Aug Oct Dec
Feb-99 Apr
Russian Rubles to US Dollar
10-32
© McGraw Hill Companies, Inc., 2000
RussiaReal GDP
-7
-6
-5
-4
-3
-2
-1
0
1
2
96 97 98
Percent
10-33
IMF Policy Prescriptions
“One size fits all” prescription for countries. Rescue efforts exacerbate the ‘moral
hazard’ problem. Too powerful without accountability.
© McGraw Hill Companies, Inc., 2000 10-34
© McGraw Hill Companies, Inc., 2000
Impact on the Countries
Currency devaluation. Declining investment. Rising prices. Rising unemployment. Rising poverty. Rising resentment?
10-35