1. Rate Determination a. Market forces constrained to upper and lower range of rates. b. Members to the arrangement adjust their national economic policies to maintain target.
ALTERNATIVE EXCHANGE RATE SYSTEMS D. Fixed Rate System 1. Rate determination a. Government maintains target rates. b. If rates threatened, central banks buy/sell currency. c. Monetary policies coordinated. 8
ALTERNATIVE EXCHANGE RATE SYSTEMS E.
Current System 1.
A hybrid system a. Major currencies: use floating method b.
Other currencies move in out of various fixedsystems. 9
PART II. A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM I. THE USE OF GOLD A. Desirable properties B. In short run: High production costs limit changes. C. In long run: Commodity money insures stability.
A BRIEF HISTORY II.
The Classical Gold Standard (1821-1914) A.
Major global currencies on gold standard. 1. Nations fix the exchange rate in terms of a specific amount of gold. 11
A BRIEF HISTORY 2. that 3.
Maintenance involved the buying and selling of gold at price. Disturbances in Price Levels: Would be offset by the pricespecie*-flow mechanism.
* specie = gold coins 12
A BRIEF HISTORY a. Price-specie-flow mechanism adjustments were automatic: 1.) When a balance of payments surplus led to a gold inflow; 2.) Gold inflow led to higher prices which reduced surplus; 3.) Gold outflow led to lower and increased surplus.
A BRIEF HISTORY III.
The Gold Exchange Standard (1925-1931) A.
Only U.S. and Britain allowed to hold gold reserves.
B. Others could hold both gold, dollars or pound reserves. 14
A BRIEF HISTORY C. Currencies devalued in 1931 - led to trade wars. D. Bretton Woods Conference - called in order to avoid future protectionist and destructive economic policies
A BRIEF HISTORY V.The Bretton Woods System (1946-1971) 1. U.S.$ was key currency; valued at $1 - 1/35 oz. of gold. 2. All currencies linked to in a fixed rate system.
A BRIEF HISTORY 3. Exchange rates allowed to fluctuate by 1% above or below initially set rates. B. Collapse, 1971 1. Causes: a. U.S. high inflation rate b.
U.S.$ depreciated sharply. 17
A BRIEF HISTORY V.Post-Bretton Woods System (1971Present) A. Smithsonian Agreement, 1971: US$ devalued to 1/38 oz. of gold. By 1973: World on a freely floating exchange rate system. 18
A BRIEF HISTORY B. OPEC and the Oil Crisis (1973-774) 1. OPEC raised oil prices four fold; 2.
Exchange rate turmoil resulted;
Caused OPEC nations to earn large surplus B-O-P. 19
A BRIEF HISTORY 4. Surpluses recycled to debtor nations which set up debt crisis of 1980’s. C. Dollar Crisis (1977-78) 1. U.S. B-O-P difficulties 2. Result of inconsistent monetary policy in U.S. 20
A BRIEF HISTORY 3. Dollar value falls as confidence shrinks. D. 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. 21
A BRIEF HISTORY 3. Result: Dollar value rises. E. The Sinking Dollar:(1985-87) 1. Dollar revaluated slowly downward; 2. Plaza Agreement (1985) G-5 agree to depress US$ further. 22
A BRIEF HISTORY 3.
Louvre Agreement (1987) G-7 agree to support the falling US$. F. Recent History (1988-Present) 1. 1988 US$ stabilized 2. Post-1991 Confidence resulted in stronger dollar 3. 1993-1995 Dollar value falls 23
PART III. THE EUROPEAN MONETARY SYSTEM I. INTRODUCTION A. The European Monetary System (EMS) 1. A target-zone method (1979) 2. Close macroeconomic policy coordination required. 24
THE EUROPEAN MONETARY SYSTEM B. EMS Objective: to provide exchange rate stability to all members by holding exchange rates within specified limits. 25