The document provides an overview of the international monetary system. It discusses the key features and issues with different exchange rate systems such as free float, managed float, target zones, and fixed rates. It outlines the history of international monetary systems including the gold standard, Bretton Woods system, and the move to floating exchange rates after 1971. The roles of the IMF and World Bank in providing stability and assistance to member countries are also summarized.

1. International Monetary
System
PRESENTED BY:
Gaurav Sharma

2. Preface
 Increased Volatility of currency affects the earnings of
MNC’s, Banks and Cross Border investor’s
 There are large and unexpected fluctuations in the
value of currency hence a setup called Bretton Woods
was formed in 1944 to reduce this riskiness of
international business
 The main feature of Bretton Woods was the relatively
fixed exchange rate of individual currency in the terms
of USD $ and convertibility of $ into gold
 In 1971 Bretton Woods fell prey to international financial
turmoil and was replaced by the present regime of
rapidly fluctuating exchange rates which resulted in
both problems and opportunities for MNC’s

3. INTERNATIONAL MONETARY
SYSTEM
 The International Monetary System refers to set
of policies, institutions, practices, regulations &
mechanism that determine the rate at which one
currency would be exchange for another.
 There are primarily 5 market mechanisms to
establish exchange rate with each having its
share of merits & demerits –
 Free float
 Managed float
 Target zone arrangement
 Fixed rate system
 Hybrid system

4.  All countries like to have economic stability &
prefer a stable exchange rate, however fixing
exchange rate often leads to currency crises
if the monetary policy is inconsistent with it
 Countries are less vulnerable to economic
shocks if they allow their currency to float
freely but that may exhibit excessive volatility
which hurts trade & economic growth
 The trade off between different mechanism
depend upon the importance of the
underlying benefits & trade offs associated
with them

5. Free Float
 Free market exchange rates are determined
by interaction of currency supply & demand
which is in turn influenced by price level
changes interest differential & economic
growth
 The exchange rate fluctuates randomly as
market participants arises & react to new
information, for example – Government
policies or acts of God & nature
 This
is also called clean float as the
exchange rates are free flowing without any
manipulation

6. Managed float
 Intervention by Government’s in the foreign
change market in order to reduce economic
uncertainty associated with free/ clean float
 This is triggered by the fear that a sudden
change in the currency appreciates or inflation of
it depreciates
 Central banks of countries intervene to smooth
as out exchange rate fluctuations & determine
the rate that is why it is called Managed/ dirty
float
 Crawling peg – unofficial pegging

7. Target zone arrangement
 Underthis system, countries adjust their
national economic policies to maintain there
exchange rates within a specific margin
 Members of the arrangement adjust their
national economic policies to maintain the
target range

8. Fixed rate
 Bretton wood was also a fixed rate mechanism, in this
type of regime, Governments are committed to maintain
a target exchange rate
 Central banks buy/ sell currency actively if the
exchange rate is threatened
 For this system to work, all member nations must
accept the groups joint inflation rate as its own.
 These controls are major source of imperfection for
MNC’s which provide both risk & opportunities to them

9. The current hybrid system
 Thecurrency system is the one where major
currencies float on a managed basis, some
currencies are freely floating while other
currencies follow various types of pegged
exchange rates
 Examples – another currency as legal tender
– Equador, el Salvador (US dollar) – pegged
against a single currency, Malaysia, Maldives,
Nepal, Iraq, Jordan

10. Brief history of International
monetary system
 Why Gold – Gold has a certain desirable
properties like durability, ease of storage, easy
recognition, standardization
 Short term changes in its stock are limited by
high production cost, making it expensive to
manipulate
 It ensures price stability in long run
 This is the reason why most currencies fairly
recent recently followed gold standard which
defined their exchange rates

11. The Gold standard
 The gold standard essentially involved a commitment
by the participating countries to fix the price of their
currencies in terms of a specific amount of gold
 The price was maintained by buying/ selling gold at that
price
 The value of gold relative to other goods does not
change much over long period of time, that helps in
maintaining monetary discipline & ensures long run
price stability
 Concept of fat money – gold standard

12. The gold standard from 1925 -
1944
 The gold standard broke down during World War
I, and was briefly re-instated between 1925-31 as
gold exchange standard
 Under this system, only US & Britain were
allowed to hold gold reserves while other could
hold both gold, dollars &/ or pound reserves
 1931 – Britain departed from Gold standard due
to high influx of gold & capital, this led to
devaluation of many currencies which in turn led
to trade wars, some economists even blame the
protectionist regimes of triggering the great
depression

13. Bretton woods (1946 – 1971 )
 To avoid destructive monetary economic policies to be
formulated allied nations agreed to form a new postwar
system
 The conference held in New hampshire also created
institutions, IMF & World Bank to promote international
financial stability
 World bank had the primary function of lending to
nations devastated by the world war
 The IMF had agenda to foster global growth and
economic stability

14. Bretton woods – The fine print
 USD became the key currency & each Government
pledged to maintain a fixed, or pegged exchange rate
vis-à-vis the dollar or gold
 1 ounce of gold = $ 35
 1 ounce of gold = 140 mark (German)
 so 4 mark = $ 1
 Exchange rates were allowed to fluctuate by 1%
above or below initial base price.
 The fixed exchange rates were maintained by official
intervention by central banks in the form of sale &
purchase of dollars with the IMF providing the foreign
exchange

15. Bretton woods (continued)
 Technical aspects of the system had
practical implications on the participating
countries
 Stabilityof exchange rates removed a great
deal of uncertainty from international trade &
investment transactions
 Italso imposed a great deal of discipline on
the participating nations economic policies

16. Fall of Bretton woods
 The Bretton wood system was fixed rate, only in name,
out of 21 major industrialized countries Only the US &
Japan held to their par value during 1946-71. Out of 21,
12 devalued their currencies more than 30% against the
dollar
 The death blow for the system came from President
Nixon, who was alarmed at high inflation rate & he
devalued the dollar to deal with the emerging trade
deficit

17. Post Bretton woods
 Smithsonian agreement of 1971 – US
devalued to 38 $ / Oz of gold & other
countries were revalued on agreed
amounts vis-à-vis the dollar
 By 1973 – The world officially turned to
floating exchange rates

18. Role of International Monetary
Fund
 The IMF works to foster global growth and economic stability. It provides
policy advice and financing to members in economic difficulties and also
works with developing nations to help them achieve macroeconomic
stability and reduce poverty.
 Its main works are –
 policy advice to governments and central banks based on analysis of
economic trends and cross-country experiences
 research, statistics, forecasts, and analysis based on tracking of global,
regional, and individual economies and markets
 loans to help countries overcome economic difficulties
 concessional loans to help fight poverty in developing countries
 It is having 188 member countries till date

19. Special Drawing Right
(SDR)
 The IMF supplemented its foreign exchange by
creating a new reserve asset, (named SDR).
 It serves as the IMF’s unit of account
 It is a weighted average of the currencies of five
nations (US, Germany, France, Japan & Great
Britain)
 The weights, which are based on the relative
importance of each country in international trade
are updated periodically

20. Role of World bank
The world bank is an internationally supported bank that
provides financial and technical assistance to developing
countries for development programs (e.g. bridges, roads,
schools)with the stated goal of reducing poverty.
Role of Bank of International
Settlements
 Acts as the “Central Bank“ for Industrial Countries’ Central
Bank
 Helps in managing FOREIGN EXCHANGE RESERVES
 BIS also holds deposits of Central Banks

21. Floating Rate system - 1973
 Proponents of the new system said that
this system would reduce economic
volatility & facilitate free trade, floating
exchange rates would offset the
differences in inflation rate
 High inflation countries would have their
currencies depreciate, allowing their
firms to stay competitive without having
to act wages & unemployment

22. Assessment of Floating Rate
system
 Currency volatility has increased – The
experience till date from the system has been
disappointing. The dollars ups & down has
little to do with inflation & a lot to do with
expectations of future government policies &
economic conditions
 Theinstability reflects the non monetary
shocks to the world economy, such as
changing oil prices & competitiveness
amongst countries

23. Jamaica Agreement 1976
 Floating rates declared acceptable
 Gold abandoned as reserve asset;
1. IMF returned gold reserves to members at
current prices
2. Proceeds placed in trust fund to help poor
nations
3. IMF quotas – member country contributions –
increased; membership now 188 countries
4. Less-develop, non-oil exporting countries given
more access to IMF
 IMF continued its role of helping countries cope
with macroeconomic and exchange rate
problems

24. Major events after 1973
 OPEC and the Oil Crisis (1973-74)
1. OPEC raised oil prices four fold
2. Exchange rate turmoil resulted
3. Caused OPEC nations to earn large surplus B-O-P.
Surpluses recycled to debtor nations which set up debt
crisis of 1980’s.
 Dollar Crisis (1977-78)
1. U.S. B-O-P difficulties
2. Result of inconsistent monetary policy in U.S.
3. Dollar value falls as confidence shrinks.

25.  The Rising Dollar (1980-85)
 1. U.S. inflation subsides as the Fed raises interest rates
 2. Rising rates attracts global capital to U.S.
 3. Result: Dollar value rises.
 The Sinking Dollar:(1985-87)
 1. Dollar revaluated slowly downward;
 2. Plaza Agreement (1985) G-5 agree to depress US $
further.
 3. Louvre Agreement (1987) G-7 agree to support the falling
US $
 Recent History (1988-2005)
 1988 US$ stabilized
 Post-1991 Confidence resulted in stronger dollar
 1993-1995 Dollar value falls

26. Financial Crisis 2007-12
Global Financial crisis: Worst Financial Crisis since the Great
Depression (1930)
EVENTS
 Subprime lending
 Growth of the housing bubble
 Easy credit conditions
 Weak and fraudulent underwriting practices
 Deregulation
 Increased debt burden or over-leveraging
 Incorrect pricing of risk
 Boom and collapse of the shadow banking system
 EURO Zone crisis
 Commodities boom
 Currency volatility

27. THANK YOU