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1、9,The International Monetary System,Chapter objective Understand the development of the international monetary system and different exchange rate system including some experiences.,Outline,1.Introduction 2.Evolution of the International Monetary System 3. Asian Currency Crisis 4.The Exchange Rate Sy
2、stem,1.Introduction,The international monetary system can be defined as the institutional framework within which international payments are made, movements of capital are accommodated, and exchange rates among currencies are determined.,It is a complex whole of agreements,roles, institutions, mechan
3、isms, and policies regarding exchange rates, international payments , and the flow of capital. It has evolved over time and will continue to do so in the future as the fundamental business and political conditions underlying the world economy continue to shift.,1.Introduction,1.Introduction,A good o
4、r idea international monetary system should provide: 1)liquidity: the amount of international reserve assets available to settle temporary balance-of-payments disequilibria. To correct BP without deflating or inflating.,1.Introduction,2)adjustment:the process by which balance-of-payment disequilibri
5、a are corrected. To minimize the cost of and the time required for adjustment. 3)Confidence:the knowledge that adjustment mechanism is working adequately and the international reserves will retain their absolute and relative values.,1.Introduction,In other words ,a good IMS should able to provide th
6、e world economy with sufficient monetary reserves to support the growth of international trade and investment. an efficient mechanism that restores the balance-of-payments equilibrium wherever it is disturbed. A safeguard to prevent crises of confidence in the system that result in panicked flights
7、from one reserve asset to another.,2.Evolution of the international monetary system,(1)Bimetallism:before 1875 (2)Classical gold standard:1875-1914 (3)Interwar period:1915-1944 (4)Bretton Woods system :1945-1972 (5)Flexible exchange rate regime:since1973,(1).Bimetallism:Before1875,A double standard
8、in that free coinage was maintained for both gold and silver. Both gold and silver were used as international means of payment and that the exchange rates among currencies were determined by either gold or silver contents. The exchange ratio between the two metals was fixed officially, only the abun
9、dant metal was used as money, driving more scarce metal out of circulation. “Bad” money drives out “good” money.,(2).Classic Gold Standard:1875-1914,During this period London became the center of the international financial system. Exist:1)gold alone is assured of unrestricted coinage 2)there is two
10、-way convertibility between gold and national currencies at a stable ratio 3)gold may be freely exported or imported The domestic money stock should rise and fall as gold flows in and out of the country.,Under the gold standard, the exchange rate between the two currencies will be determined by thei
11、r gold content. 1ounce=6 1ounce=12 francs 1=2Fr The pound and the franc remain the pegged to gold at given prices,the exchange rate between the two currencies will remain stable.,(2).Classic Gold Standard:1875-1914,Under this standard, international imbalances of payment will also be corrected autom
12、atically. The adjustment mechanism is referred to as the price-specie-flow mechanism, which is attributed to David Hume,a Scottish philosopher. Since each nations money supply consisted of either gold itself or paper currency back by gold,the money supply would fall in the deficit nation and rise in
13、 the surplus nation.,(2).Classic Gold Standard:1875-1914,Cause internal prices to fall in the deficit nation and rise in the surplus one. Result: the export of the deficit nation would be encouraged and its import discouraged until its balance-of payments deficit was eliminated. The opposite would o
14、ccur in the surplus nation.If gold is used as sole international means of payment,then countriesbalance of payments will be regulated automatically via the movements of gold.,(2).Classic Gold Standard:1875-1914,Shortcomings: 1)the world economy can face deflationary pressures 2)whenever the governme
15、nt finds it politically necessary to pursue national objectives that are inconsistent with maintaining the gold standard , it can abandon the gold standard that has no mechanism to compel each major country to abide by the rules of the game.,(2).Classic Gold Standard:1875-1914,(3).Interwar Period:19
16、15-1944,World War ended the gold standard in Aug. 1914,as major countries such as Britain,France, Germany suspended redemption of banknotes in gold and imposed embargoes on gold export. As major countries began to recover from the war and stabilized their economies,they attempted to restore the gold standard.,The U.S replaced Great Britain as the dominant financial power, and with only mild inflation ,was in an effort to restore the gold standard. The international gold standard of the la
