0
The International Monetary System Part I
Introduction <ul><li>The international monetary system refers to </li></ul><ul><li>the institutional arrangements that cou...
Introduction <ul><li>International monetary systems are sets of internationally agreed rules, conventions and supporting i...
Introduction <ul><li>It addresses to solve the problems relating to </li></ul><ul><li>international trade: </li></ul><ul><...
The problem of Liquidity <ul><li>The problem of liquidity existed even in the </li></ul><ul><li>domestic transactions thro...
The Gold Standard <ul><li>The first modern international monetary system was the gold standard  </li></ul><ul><li>Put in e...
Gold Standard- I ( 1876-1913) <ul><li>In this system, each currency was linked to a weight of gold </li></ul><ul><li>Under...
Gold Standard- I ( 1876-1913) <ul><li>Most of the countries used to declare par value of their currency in terms of gold <...
The Gold Standard <ul><li>After World War I, the exchange rates were  </li></ul><ul><li>allowed to fluctuate </li></ul><ul...
The System of Bretton Woods  ( 1944-71) <ul><li>In July, 1944, 44 countries met in Bretton  </li></ul><ul><li>Woods, New H...
The Bretton Woods Agreement  <ul><li>Creation of International Monetary Fund (IMF) </li></ul><ul><li>to promote consultati...
The Bretton Woods Agreement  <ul><li>Each member to pay a quota into IMF pool – </li></ul><ul><li>one quarter in gold and ...
The System of Bretton Woods  ( 1944-71) <ul><li>So in effect this was a gold – dollar exchange  </li></ul><ul><li>standard...
Collapse of the  Fixed Exchange System <ul><li>The system of fixed exchange rates  </li></ul><ul><li>established at Bretto...
Collapse of the  Fixed Exchange System <ul><li>During end of sixties, European  </li></ul><ul><li>governments wanted gold ...
The end of the Bretton Woods System (1972–81)  <ul><li>The system dissolved between 1968  and </li></ul><ul><li>1973 </li>...
The end of the Bretton Woods System (1972–81) <ul><li>IMF members have been free to choose any </li></ul><ul><li>form of e...
Exchange Systems after 1973 <ul><li>Exchange Rate systems are classified on the basis of the flexibility that the monetary...
Exchange Systems after 1973 <ul><li>But as usual, between these two extreme positions there exists also an intermediate ra...
A fixed peg regime <ul><li>A fixed peg regime exists when the exchange rate of the home currency is fixed to an anchor cur...
Floating Exchange Rate System <ul><li>The collapse of Bretton Woods and Smithsonian Agreements coupled with oil crisis of ...
Floating Exchange Rate System <ul><li>No country in the world has adopted freely floating exchange rate system </li></ul><...
Independent Floating systems <ul><li>In Independent Floating systems the exchange rate is market determined and monetary p...
Managed Floating systems <ul><li>Managed Floating systems usually let the market take its own course but the monetary auth...
Intermediate Regimes ( Soft Pegs) <ul><li>Intermediate exchange rate regimes consist of an array of differing systems allo...
Conventional fixed exchange rate pegs <ul><li>In a Conventional Fixed Peg arrangement a currency is pegged at a fixed rate...
Crawling Peg ( The Dirty Float) <ul><li>In this system an attempt is made to combine the advantages of fixed exchange rate...
Crawling Peg ( The Dirty Float) <ul><li>In a Crawling Peg arrangement the currency is adjusted periodically “in small amou...
Crawling Peg ( The Dirty Float) <ul><li>The upper and lower limits are decided for exchange rate depending demand and supp...
Trends in Global Exchange Rate Regimes
Exchange Rate Regimes   <ul><li>IMF Members, 2006 </li></ul>
Exchange Rates Since 1973 <ul><li>Since 1973, exchange rates have become more volatile and less predictable than they were...
Exchange Rates Since 1973 <ul><li>The merits of each continue to be debated </li></ul><ul><li>There is no agreement as to ...
Implications For Managers <ul><li>For managers, understanding the international monetary system is important for: </li></u...
Currency Management <ul><li>Managers must recognize that the current  </li></ul><ul><li>international monetary system is a...
Business Strategy <ul><li>Managers need to recognize that while </li></ul><ul><li>exchange rate movements are difficult to...
Corporate-Government Relations   <ul><li>Managers need to recognize that  </li></ul><ul><li>businesses can influence gover...
Evolution of Indian Exchange Rate system <ul><li>1931 – Rupee pegged to Pound Sterling –    parity Rs. 1= shilling 1 and 6...
Evolution of Indian Exchange Rate system <ul><li>1967 – Pound again devalued by 14.3% but    India did not – it delinked r...
Evolution of Indian Exchange Rate system <ul><li>Sept. 1975 – the sterling peg was replaced    by a basket peg - The    fl...
Evolution of Indian Exchange Rate system <ul><li>1992-93 Budget – the rupee was made fully convertible on current account ...
GOOD LUCK TO YOU
Upcoming SlideShare
Loading in...5
×

International Monetary System

9,716

Published on

1 Comment
12 Likes
Statistics
Notes
No Downloads
Views
Total Views
9,716
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
795
Comments
1
Likes
12
Embeds 0
No embeds

No notes for slide
  • Country Focus: The U.S. Dollar, Oil Prices, and Recycling Petrodollars Summary This feature e closing case explores what oil producing nations are likely to do with the dollars they have earned. Recently, oil prices have surged as a result of higher than expected demand, tight supplies, and perceived geopolitical risks. Since oil is priced in dollars, oil producers have seen their dollar reserves increase. Discussion of the feature can begin with the following questions. 1. What will happen to the value of the U.S. dollar if oil producers decide to invest most of their earnings from oil sales in domestic infrastructure projects? Discussion Points: If oil producers decide to invest their earnings in domestic infrastructure projects, it would be expected that the countries involved would see a boost in economic growth, and an increase in imports. This would put downward pressure on the dollar as the petrodollars are sold, or are invested in the local community, however the expected increase in imports that should result from greater economic growth would increase the demand for dollars. 2. What factors determine the relative attractiveness of dollar, euro, and yen denominated assets to oil producers flush with petrodollars? What might lead them to direct more funds towards non-dollar denominated assets? Discussion Point s: The relative attractiveness of an investment whether it is denominated in dollars, euro, or yen depends on expected returns and the degree of risk associated with the investment. When considering different currencies, it would be important to consider expected shifts in the exchange rate. So, for example, if the dollar was expected to depreciate relative to the euro or yen, non-dollar denominated assets might be more attractive all else being equal.
  • Transcript of "International Monetary System"

    1. 1. The International Monetary System Part I
    2. 2. Introduction <ul><li>The international monetary system refers to </li></ul><ul><li>the institutional arrangements that countries </li></ul><ul><li>adopt to govern exchange rates </li></ul>
    3. 3. Introduction <ul><li>International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states </li></ul>
    4. 4. Introduction <ul><li>It addresses to solve the problems relating to </li></ul><ul><li>international trade: </li></ul><ul><li>a. Liquidity </li></ul><ul><li>b. Adjustment </li></ul><ul><li>c. Stability </li></ul>
    5. 5. The problem of Liquidity <ul><li>The problem of liquidity existed even in the </li></ul><ul><li>domestic transactions through barter </li></ul><ul><li> system </li></ul><ul><li>Barter system was replaced by precious </li></ul><ul><li>metals as a medium of exchange and store </li></ul><ul><li> of value </li></ul><ul><li>Gold standard system of international </li></ul><ul><li>payments came into existence </li></ul>
    6. 6. The Gold Standard <ul><li>The first modern international monetary system was the gold standard </li></ul><ul><li>Put in effect in 1850 </li></ul><ul><li>Participants – UK, France, Germany & USA </li></ul>USA Japan Gold Trade
    7. 7. Gold Standard- I ( 1876-1913) <ul><li>In this system, each currency was linked to a weight of gold </li></ul><ul><li>Under gold standard, each country had to establish the rate at which its currency could be converted to a weight of gold </li></ul><ul><li>E.g. $ 20.67/ ounce ; Pound 4.247/ once </li></ul>
    8. 8. Gold Standard- I ( 1876-1913) <ul><li>Most of the countries used to declare par value of their currency in terms of gold </li></ul><ul><li>The problem was every country needed to maintain adequate reserves of gold in order to back its currency </li></ul>
    9. 9. The Gold Standard <ul><li>After World War I, the exchange rates were </li></ul><ul><li>allowed to fluctuate </li></ul><ul><li>Since gold was convertible into currencies </li></ul><ul><li>of the major developed countries, central </li></ul><ul><li>banks of different countries either held gold </li></ul><ul><li>or currencies of these developed countries </li></ul>
    10. 10. The System of Bretton Woods ( 1944-71) <ul><li>In July, 1944, 44 countries met in Bretton </li></ul><ul><li>Woods, New Hampshire, USA – a new </li></ul><ul><li>International Monetary System was created </li></ul><ul><li>John Maynard Keynes of Britain and Harry </li></ul><ul><li>Dexter White of USA were the key movers </li></ul>
    11. 11. The Bretton Woods Agreement <ul><li>Creation of International Monetary Fund (IMF) </li></ul><ul><li>to promote consultations and collaboration </li></ul><ul><li>on international monetary problems and </li></ul><ul><li>countries with deficit balance of payments </li></ul><ul><li>Establish a par value of currency with </li></ul><ul><li>approval of IMF </li></ul><ul><li>Maintain exchange rate for its currency </li></ul><ul><li>within one percent of declared par value </li></ul>
    12. 12. The Bretton Woods Agreement <ul><li>Each member to pay a quota into IMF pool – </li></ul><ul><li>one quarter in gold and the rest in their own </li></ul><ul><li>currency </li></ul><ul><li>The pool to be used for lending </li></ul><ul><li>Dollar was to be convertible to gold till </li></ul><ul><li>international instrument was introduced </li></ul><ul><li>International Bank for Reconstruction and </li></ul><ul><li>Development (IBRD) was created to </li></ul><ul><li>rehabilitate war-torn countries and help </li></ul><ul><li>developing countries </li></ul>
    13. 13. The System of Bretton Woods ( 1944-71) <ul><li>So in effect this was a gold – dollar exchange </li></ul><ul><li>standard ( $35/ounce)- known as fixed </li></ul><ul><li>exchange rate system or adjustable peg </li></ul><ul><li>Devaluation could not be resorted arbitrarily </li></ul><ul><li>When BOP problem became structural i.e. </li></ul><ul><li>repetitive, devaluation upto ten percent was </li></ul><ul><li>permitted by IMF </li></ul><ul><li>Thus each currency was tied to dollar directly </li></ul><ul><li>or indirectly </li></ul>
    14. 14. Collapse of the Fixed Exchange System <ul><li>The system of fixed exchange rates </li></ul><ul><li>established at Bretton Woods worked well </li></ul><ul><li>until the late 1960’s </li></ul><ul><li>Any pressure to devalue the dollar would </li></ul><ul><li>cause problems throughout the world </li></ul><ul><li>The trade balance of the USA became highly </li></ul><ul><li>negative and a very large amount of US </li></ul><ul><li>dollars was held outside the USA ; it was </li></ul><ul><li>more than the total gold holdings of the USA </li></ul>
    15. 15. Collapse of the Fixed Exchange System <ul><li>During end of sixties, European </li></ul><ul><li>governments wanted gold in return for the </li></ul><ul><li>dollar reserves they held </li></ul><ul><li>On 15 th Aug. 1971, President Nixon </li></ul><ul><li>suspended the system of convertibility of </li></ul><ul><li>gold and dollar and decided for floating </li></ul><ul><li>exchange rate system </li></ul>
    16. 16. The end of the Bretton Woods System (1972–81) <ul><li>The system dissolved between 1968 and </li></ul><ul><li>1973 </li></ul><ul><li>By March 1973, the major currencies began </li></ul><ul><li>to float against each other </li></ul>
    17. 17. The end of the Bretton Woods System (1972–81) <ul><li>IMF members have been free to choose any </li></ul><ul><li>form of exchange arrangement they wish </li></ul><ul><li>(except pegging their currency to gold): </li></ul><ul><ul><li>Allowing the currency to float freely </li></ul></ul><ul><ul><li>Pegging it to another currency or a basket </li></ul></ul><ul><ul><li>of currencies </li></ul></ul><ul><ul><li>Adopting the currency of another country, </li></ul></ul><ul><ul><li>participating in a currency bloc, or </li></ul></ul><ul><ul><li>Forming part of a monetary union </li></ul></ul>
    18. 18. Exchange Systems after 1973 <ul><li>Exchange Rate systems are classified on the basis of the flexibility that the monetary authorities show towards fluctuations in the exchange rates and are divided into two categories: </li></ul><ul><li>1. Systems with a fixed exchange rate </li></ul><ul><li>( “f ixed peg” or “ hard peg ”) and </li></ul><ul><li>2. Systems with a flexible exchange rate ( “ Floating” systems) </li></ul>
    19. 19. Exchange Systems after 1973 <ul><li>But as usual, between these two extreme positions there exists also an intermediate range of different systems with limited flexibility, usually referred to as “soft pegs” </li></ul>
    20. 20. A fixed peg regime <ul><li>A fixed peg regime exists when the exchange rate of the home currency is fixed to an anchor currency </li></ul><ul><li>This is the case with economies having currency boards or with no separate national currency of their own </li></ul><ul><li>Countries do not have a separate national currency, either when they have formally dollarized, or when the country is a member of a currency union, for example Euro </li></ul>
    21. 21. Floating Exchange Rate System <ul><li>The collapse of Bretton Woods and Smithsonian Agreements coupled with oil crisis of 1970, the floating exchange rate system was adopted by leading industrialised countries </li></ul><ul><li>Officially approved in April 1978 </li></ul><ul><li>Under the system, the exchange rate would be determined by market forces without the intervention of government </li></ul>
    22. 22. Floating Exchange Rate System <ul><li>No country in the world has adopted freely floating exchange rate system </li></ul><ul><li>Floating exchange rate regimes consist of independent floating and managed floating systems </li></ul>
    23. 23. Independent Floating systems <ul><li>In Independent Floating systems the exchange rate is market determined and monetary policy usually functions without exchange rate considerations </li></ul><ul><li>Foreign exchange interventions are rare and meant to prevent undue fluctuations </li></ul><ul><li>But no attempt is undertaken to achieve/maintain a particular rate </li></ul>
    24. 24. Managed Floating systems <ul><li>Managed Floating systems usually let the market take its own course but the monetary authorities intervene in the market to “manage” the exchange rate, if needed, to prevent high volatilities and to stimulate growth, without committing to a particular exchange rate level </li></ul><ul><li>The monetary authorities do not specify their opinion on “suitable” exchange rate level </li></ul><ul><li>The IMF calls this practice a “Managed Floating With No Predetermined Path for the Exchange Rate” </li></ul>
    25. 25. Intermediate Regimes ( Soft Pegs) <ul><li>Intermediate exchange rate regimes consist of an array of differing systems allowing a varying degree of flexibility, such as conventional fixed exchange rate pegs, crawling pegs and exchange rate bands </li></ul>
    26. 26. Conventional fixed exchange rate pegs <ul><li>In a Conventional Fixed Peg arrangement a currency is pegged at a fixed rate to a major currency or a basket of currencies, allowing the exchange rate to fluctuate within a narrow margin of ±1 percent around a formal (or de facto ) central rate </li></ul><ul><li>The monetary authority intervenes in the market, if the fluctuation is outside these limits </li></ul><ul><li>(post-crisis Malaysia, fixing Ringgit against US dollar for a rate of RM 3,8 per $1) </li></ul>
    27. 27. Crawling Peg ( The Dirty Float) <ul><li>In this system an attempt is made to combine the advantages of fixed exchange rate with flexibility of floating exchange rate </li></ul><ul><li>It fixes the exchange rate at a given level which is responsive to changes in market conditions i.e. it is allowed to crawl </li></ul>
    28. 28. Crawling Peg ( The Dirty Float) <ul><li>In a Crawling Peg arrangement the currency is adjusted periodically “in small amounts at a fixed rate or in response to changes in selective quantitative indicators (past inflation differentials vis-à-vis major trading partners…) </li></ul><ul><li>A Crawling Band allows a periodic adjustment of the exchange rate band itself </li></ul>
    29. 29. Crawling Peg ( The Dirty Float) <ul><li>The upper and lower limits are decided for exchange rate depending demand and supply of foreign exchange </li></ul><ul><li>As the exchange rate crosses these limits, fiscal and monetary policies come into play to push the exchange rate within the target zone </li></ul><ul><li>But in this case, these limits are sustained for some time and if it is felt that economic indicators are being disturbed, the monetary authorities let the exchange rate depreciate or appreciate as the case may be </li></ul>
    30. 30. Trends in Global Exchange Rate Regimes
    31. 31. Exchange Rate Regimes <ul><li>IMF Members, 2006 </li></ul>
    32. 32. Exchange Rates Since 1973 <ul><li>Since 1973, exchange rates have become more volatile and less predictable than they were between 1945 and 1973, due to: </li></ul><ul><ul><li>Oil crisis -1971 </li></ul></ul><ul><ul><li>Loss of confidence in the dollar - 1977-78 </li></ul></ul><ul><ul><li>Oil crisis – 1979, OPEC increases price of oil </li></ul></ul><ul><ul><li>Unexpected rise in the dollar - 1980-85 </li></ul></ul><ul><ul><li>Rapid fall of the dollar - 1985-87 and 1993-95 </li></ul></ul><ul><ul><li>Partial collapse of European Monetary System – </li></ul></ul><ul><ul><li>1992 </li></ul></ul><ul><ul><li>Asian currency crisis - 1997 </li></ul></ul>
    33. 33. Exchange Rates Since 1973 <ul><li>The merits of each continue to be debated </li></ul><ul><li>There is no agreement as to which system </li></ul><ul><li>is better </li></ul><ul><li>Many countries today are disappointed </li></ul><ul><li>with the floating exchange rate system </li></ul>
    34. 34. Implications For Managers <ul><li>For managers, understanding the international monetary system is important for: </li></ul><ul><ul><li>C urrency management </li></ul></ul><ul><ul><li>Business strategy </li></ul></ul><ul><ul><li>Corporate-government relations </li></ul></ul>
    35. 35. Currency Management <ul><li>Managers must recognize that the current </li></ul><ul><li>international monetary system is a managed </li></ul><ul><li>float system in which government </li></ul><ul><li>intervention can help drive the foreign </li></ul><ul><li>exchange market </li></ul><ul><li>Under the present system, speculative </li></ul><ul><li>buying and selling of currencies can create </li></ul><ul><li>volatile movements in exchange rates </li></ul>
    36. 36. Business Strategy <ul><li>Managers need to recognize that while </li></ul><ul><li>exchange rate movements are difficult to </li></ul><ul><li>predict, their movement can have a major </li></ul><ul><li>impact on the competitive position of </li></ul><ul><li>businesses </li></ul><ul><li>To contend with this situation, managers </li></ul><ul><li>need strategic flexibility e.g. dispersing </li></ul><ul><li>production to different locations </li></ul>
    37. 37. Corporate-Government Relations <ul><li>Managers need to recognize that </li></ul><ul><li>businesses can influence government </li></ul><ul><li>policy towards the international monetary </li></ul><ul><li>system </li></ul><ul><li>Companies should promote an </li></ul><ul><li>international monetary system that </li></ul><ul><li>facilitates international growth and </li></ul><ul><li>development </li></ul>
    38. 38. Evolution of Indian Exchange Rate system <ul><li>1931 – Rupee pegged to Pound Sterling – parity Rs. 1= shilling 1 and 6 pence </li></ul><ul><li>1944 – IMF asked nations to peg currency to dollar or gold – chose gold – parity again with sterling – </li></ul><ul><li> BP 1 = Rs. 13.33 </li></ul><ul><li>1949 – Pound was devalued 30.5% so was </li></ul><ul><li> Rupee but 36.5% in dollar terms </li></ul>
    39. 39. Evolution of Indian Exchange Rate system <ul><li>1967 – Pound again devalued by 14.3% but India did not – it delinked rupee from pound and linked it to dollar </li></ul><ul><li>1971 – Smithsonian Agreement – the international currencies were realigned– India returned to sterling </li></ul><ul><li> peg – parity BP = Rs. 18.9677 </li></ul><ul><li> The fluctuation of (+)/(-) 2.25% was allowed </li></ul>
    40. 40. Evolution of Indian Exchange Rate system <ul><li>Sept. 1975 – the sterling peg was replaced by a basket peg - The fluctuation band widened to </li></ul><ul><li> (+)/(-) 5% </li></ul><ul><li>July 1991 – the rupee was devalued twice by 18-20% </li></ul><ul><li>1991-92 Budget - partial convertibility on current account </li></ul>
    41. 41. Evolution of Indian Exchange Rate system <ul><li>1992-93 Budget – the rupee was made fully convertible on current account and a liberalized exchange rate management system ( LERMS) was introduced </li></ul><ul><li>Presently, FEDAI announces indicative rates on every business day . RBI has discretion to enter the market to stabilise the exchange rate </li></ul>
    42. 42. GOOD LUCK TO YOU
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×