Final Ppt International Fiance
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Transcript of Final Ppt International Fiance
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The International Monetary SystemThe International Monetary System
Arora Gaurav Singh
Mukesh Kumar
Rwechungura Seriaris
Amandeep Singh
Gurpreet Singh
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Introduction
The institutional arrangements that countries adopt
to govern exchange rates are known as the
international monetary system
When a country allows the foreign exchange market
to determine the relative value of a currency, a
floating exchange rate system exists
T
he systems can grow organically as the collectiveresult of numerous individual agreements between
international economic actors spread over several
decades
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Goals
In open economies, policymakers are motivated by
two goals:
Internal balance
It requires the full employment of a countrys
resources and domestic price level stability.
External balance
It is attained when a countrys current account is
neither so deeply in deficit nor so strongly in surplus.
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Gold Standard, 1870-1914
Origins of the Gold Standard
The gold standard had its origin in the use of gold
coins as a medium of exchange, unit of account, and
store of value. The Resumption Act (1819) marks the first adoption
of a true gold standard.
It simultaneously repealed long-standing restrictions
on the export of gold coins and bullion from Britain.
The U.S. Gold Standard Act of 1900 institutionalized
the dollar-gold link.
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Era of Gold Standard
The gold standard worked fairly well from the 1870s
until the start of World War I in 1914
During the war, many governments financed their
war expenditures by printing money, and in doing so,created inflation
People lost confidence in the system and started to
demand gold for their currency putting pressure on
countries' gold reserves, and forcing them to suspend
gold convertibility
By 1939, the gold standard was dead.
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The Interwar Years, 1918-1939
With the eruption of WWI in 1914, the gold
standard was suspended.
The interwar years were marked by severe economic
instability.
The reparation payments led to episodes of
hyperinflation in Europe.
The German Hyperinflation
Germanys price index rose from a level of 262 in
January 1919 to a level of 126,160,000,000,000 in
December 1923 (a factor of 481.5 billion).
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The Fleeting Return to Gold
1919
U.S. returned to gold
1922
A group of countries (Britain, France, Italy, and Japan)
agreed on a program calling for a general return to the
gold standard and cooperation among central banks
in attaining external and internal objectives.
The Interwar Years, 1918-1939
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1925
Britain returned to the gold standard
1929
The Great Depression was followed by bank failuresthroughout the world.
1931
Britain was forced off gold when foreign holders of
pounds lost confidence in Britains commitment tomaintain its currencys value.
The Interwar Years, 1918-1939
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International Economic Disintegration
Many countries suffered during the Great
Depression.
Major economic harm was done by restrictions oninternational trade and payments.
These beggar-thy-neighbor policies provoked
foreign retaliation and led to the disintegration of
the world economy.
All countries situations could have been bettered
through international cooperation
Bretton Woods agreement
The Interwar Years, 1918-1939
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The Interwar Years, 1918-1939
Industrial Production and Wholesale Price Index Changes,
1929-1935
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.
The Bretton Woods System & the IMF
International Monetary Fund (IMF)
In July 1944, 44 representing countries met in
Bretton Woods, New Hampshire to set up a system
of fixed exchange rates. All currencies had fixed exchange rates against the
U.S. dollar and an unvarying dollar price of gold
($35 an ounce).
It intended to provide lending to countries withcurrent account deficits.
It called for currency convertibility.
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Orgaisations Involved
The Bretton Woods agreement also established two
multinational institutions:
the International Monetary Fund (IMF) to maintain
order in the international monetary system
the World Bank to promote general economic
development .
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Goals and Structure of the IMF
The IMF agreement tried to incorporate sufficient
flexibility to allow countries to attain external
balance without sacrificing internal objectives orfixed exchange rates.
Two major features of the IMF Articles of Agreement
helped promote this flexibility in external
adjustment: IMF lending facilities
IMF conditionality is the name for the surveillance over the
policies of member counties who are heavy borrowers of
Fund resources.
and the International Monetary
Fund
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Convertibility
Convertible currency
A currency that may be freely exchanged for foreign
currencies. Example: The U.S. and Canadian dollars became convertible
in 1945. A Canadian resident who acquired U.S. dollars could
use them to make purchases in the U.S. or could sell them to
the Bank ofCanada.
The IMF articles called for convertibility on currentaccount transactions only.
The Bretton Woods System & the IMF
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The RoleOfThe World Bank
The World Bank is also called the International Bank forReconstruction and Development (IBRD)
There are two ways to borrow from the World Bank:
1. under the IBRD scheme, money is raised through bond salesin the international capital market
borrowers pay what the bank calls a market rate of interest -the bank's cost of funds plus a margin for expenses.
2. through the International Development Agency, an arm of
the bank created in 1960 IDA loans go only to the poorest countries
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The CollapseOfThe Fixed
Exchange Rate System
Bretton Woods worked well until the late 1960s.
It collapsed when huge increases in welfare
programs and the Vietnam War were financed by
increasing the money supply and causing significantinflation
Other countries increased the value of their
currencies relative to the dollar in response to
speculation the dollar would be devalued
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Collapse
However, because the system relied on an
economically well managed U.S., when the U.S.
began to print money, run high trade deficits, and
experience high inflation, the system was strainedto the breaking point
Slide 18-17Copyright 2003 Pearson Education, Inc.
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The Floating Exchange Rate Regime
In 1976, following the collapse of Bretton Woods,
IMF members formalized a new exchange rate system
at a meeting in Jamaica.
The rules that were agreed on then, are still in placetoday.
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The Jamaica Agreement
Under the Jamaican agreement:
floating rates were declared acceptable
gold was abandoned as a reserve asset
total annual IMF quotas - the amount member
countries contribute to the IMF - were increased to
$41 billion.
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Exchange Rates Since 1973
Since 1973, exchange rates have become more
volatile and less predictable than they were between
1945 and 1973.
Volatility has increased because of:
The 1971 oil crisis
The loss of confidence in the dollar that followed the
rise of U.S. inflation in 1977 and 1978
The 1979 oil crisis.
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The unexpected rise in the dollar between 1980 and
1985
The partial collapse of the European Monetary
System in 1992
The 1997 Asian currency crisis.
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Fixed Versus Floating Exchange
Rates
The merit of a fixed exchange rate versus a floating
exchange rate system continues to be debated
Many countries today are disappointed with the
floating exchange rate system.
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Special Drawing Right (SDR)
SDR (Special Drawings Rights) : this were created by
the IMF in 1969 as a type of reserve assets to
supplement international reserves of gold &national currencies for setting balance of payment
accounts.
SDR is the IMFs main reserve asset, & is held by
member-countries of the IMF as part of their
international reserves. A member may use their
special account to obtain needed foreign currency
from another member.
SDR
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VALUED
1. Japanese Yen
2. US Dollars
3. British Pounds
4. Euros
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CURRENT STATUSQO
Practice of FLOATING RATE EXCHANGE SYSTEM.
A floating-exchange rate system permits each
currency to find its own level of exchange, which
will change from time-to-time, as economicconditions change.
However many countries are still not comfortable.
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CURRENT STATUSQOOF IMF
It is an organization formed with a stated objective
of stabilizing international exchange rates and
facilitating development through the enforcement
of liberalising economic policies on other countriesas a condition for loans, restructuring or aid.
It also offers highly leveraged loans mainly
to poorer countries.
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SATUSQOOF IMF
Headquarters in Washington, D.C.
An organization of 187 countries (as of July 2010).
Facilitate international trade, promote high
employment and sustainable economic growth, and
reduce poverty.
With the exception ofCuba (left in 1964),
T
aiwan(expelled in 1980), North Korea AndorraMonaco Liechtenstein Tuvalu and Nauru, all UN
member states participate directly in the IMF.
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Member states are represented on a 24-member
Executive Board (five Executive Directors are
appointed by the five members with the largest
quotas, nineteen Executive Directors are elected bythe remaining members), and all members appoint
a Governor to the IMF's Board of Governors .
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THANK YOU.