Int Monetary System PPT 1
Int Monetary System PPT 1
Int Monetary System PPT 1
DEFINITION
‘‘ International Monetary System is part of the institutional framework
that binds national economies, such a system permits producers to
specialize in those goods for which they have a comparative advantage,
and serves to seek profitable investment opportunities on a global
basis’’
EVOLUTION OF INTERNATIONAL MONETARY
SYSTEM
• Countries had abandoned the gold standard, the international trade and
capital flows shrank and started printing money to pay for war related
expenses.
• After the war, with high rates of inflation and a large amount of
outstanding money.
• The goal was exchange rate stability without the gold standard.
• The result was the creation of the IMF and the World Bank.
OBJECTIVE
• Freedom for governments to pursue domestic polices
• Promoting employment
• Each country was allowed to have a 1% band around which their currency
was allowed to fluctuate around the fixed rate.
• The IMF was created with the specific goal of being the multilateral body
that monitored the implementation of the Bretton Woods agreement.
• Central banks had to exchange domestic currency for dollars
upon request.
• Changes in monetary policy can affect both the output in its country as
well as output in other countries.
• Conditions
- Price of gold was raised to $38 per ounce
• When a currency trends towards crossing over the limits, government intervene to
keep it within the band.
• Advantages
A. Adjustment to changes in macro- economic variables.
B. Stable equilibrium in the long run.
THE FLEXIBLE EXCHANGE RATE REGIME
• Flexible exchange rates were acceptable to the
IMF members.
1.Floating
Independent floating system
Managed floating systems
2.Pegging
3.Target Zone Arrangements
1. FLOATING
INDEPENDENT FLOATING SYSTEM
• The upper and lower limits are decided for exchange rate depending
demand and supply of foreign exchange.
a common currency.
FIXED VERSUS FLEXIBLE EXCHANGE
RATE REGIMES
To Facilitate
1. International trade
1. Liquidity
2. Adjustment
3. Stability
FEATURES OF IMS
Flow of international trade
Investment according to comparative advantage
Stability in foreign exchange
Promoting Balance of Payments
Providing countries with sufficient liquidity
Plan for avoiding uncertainty
Allowing member countries to pursue independent monetary and fiscal
policies
IMPLICATIONS FOR MANAGERS
- Business strategy