1. International Monetary System: • International monetary systems are sets of
internationally agreed rules, conventions and supporting institutions, that facilitate
international trade, cross border investment and generally their allocation of capital
between nation states. Features that IMS should possess • Efficient and unrestricted
flow of international trade and investment. • Stability in foreign exchange aspects. • Promoting
balance of payments adjustments to prevent disruptions associated • Providing countries with
sufficient liquidity to finance temporary balance of payment deficits. • Should at least try avoid
adding further uncertainty. • Allowing member countries to pursue independent monetary and
fiscal policies. Requirements of good IMS • Adjustment: a good system must be able to adjust
imbalances in balance of payments quickly and at a relatively lower cost. • Stability and
Confidence: the system must be able to keep exchange rates relatively fixed and people must
have confidence in the stability of the system. • Liquidity: the system must be able to provide
enough reserve assets for a nation to correct its balance of payments deficits without making the
nation run into deflation or inflation. Stages in IMS>Bimetallism: Before 1875 • A “double
standard” in the sense that both gold and silver were used as money. Classical Gold Standard:
1875-1914 • Exchange rate between any two currencies was determined by their gold content.
Interwar Period: 1915-1944 • Described as a period of de-globalization. Bretton Woods
System: 1945-1972 • The goal was exchange rate stability without the gold standard.• Promoting
employment. The Flexible Exchange Rate Regime: 1973-Present. 1. Fixed exchange rate 2.
Flexible exchange rate. Types of Exchange Rate> 1.Independent Floating System/ Free Float
• Independent floating system does not involve intervention and so termed as “clean Floating”.
2.>Managed Floating System • Involves direct or indirect intervention by the monetary
authorities of the country to stabilize the exchange rate. • Indirect intervention- the monetary
authorities stabilize the exchange rate through changing the interest rate. • Direct intervention-
the monetary authorities purchase and sell foreign currency in the domestic market. 3>Pegging •
Periodic adjustment of fixed exchange rate to catch up with market determined rates. • Combine
the advantages of fixed exchange rate with flexibility of floating exchange rate. • Such as U.S.
dollar or Euro. 4>Target Zone Arrangements • Target zone arrangement involves member
countries having fixed exchange rate among their currencies. Alternatively, they may use a
common currency. • Some countries do not bother printing their own, they just use the U.S.
dollar. For example; Ecuador, Panama. Effects of Exchange Rate on Business • The
Effect of Depreciation on Trading Businesses - When there is a depreciation in local currency,
it’s good news for exporting companies. Depreciation results higher demand for their products in
the global market, which can increase their sales. - This also means that imports will cost more,
which will hurt companies that focus on imports as the main aspect of their business. • The
Effect of Appreciation on Trading Businesses - Export companies will be affected negatively
because now their products are at higher rates than their competition. - Importers will be able to
import raw goods at a much better price, which is a win for them. • Indirect Effects- Sometimes
exchange rates affect business, even they don’t directly work in exporting or importing goods.-
something that will transfer the goods for businesses, even if it’s locally. • Foreign Currency
Conversion Fees- The currency exchange rate can also affect business that makes international
payments, due to various foreign currency conversion rates they’re faced with.
