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The International Monetary System
The Value of the U.S. Dollar since 1960
Outline
Exchange Rate EquilibriumHistory of the International Monetary System Current Exchange Rate ArrangementsFixed versus Flexible Exchange Rate RegimesEuro and the European Monetary Union
Measuring Exchange Rate Movements
An exchange rate measures the value of one currency in units of another currency.£ 1 = $ 1.55The exchange rate $/£ = 1.55When a currency declines in value, it is said to depreciate. When it increases in value, it is said to appreciate.
Fluctuation of the British Pound Over Time
Online Application
For the latest exchange rates, visit:http://www.bloomberg.com/http://www.reuters.com/http://finance.yahoo.com/http://money.cnn.com/
Exchange Rate Equilibrium
An exchange rate represents the price of a currency, which is determined by the demand for that currency relative to the supply for that currency.
History of the International Monetary System
Classical Gold Standard: 1876-1913Interwar Period: 1914-1944Bretton Woods: 1944 Fixed Exchange Rates: 1945-1973The Flexible Exchange Rate Regime: 1973-Present
History of the International Monetary System
The Gold Standard (1876 – 1913) Gold has been a medium of exchange since 3000 BC“Rules of the game” were simple, each country set the rate at which its currency unit could be converted to a weight of goldCurrency exchange rates were in effect “fixed”The Gold Standard: 1876-1913 For example, if the dollar is pegged to gold at U.S. $30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents:
Misalignment of exchange rates and international imbalances of payment were automatically corrected.If the exchange rate is $4 = £1, how does it make a correction?
Price-Specie-Flow Mechanism
Suppose Great Britain exports more to France than France imports from Great Britain.This cannot persist under a gold standard.Net export of goods from Great Britain to France will be accompanied by a net flow of gold from France to Great Britain.This flow of gold will lead to a lower price level in France and, at the same time, a higher price level in Britain.The resultant change in relative price levels will slow exports from Great Britain and encourage exports from France.
The Gold Standard: 1875-1913
Highly stable exchange rates under the classical gold standard provided an environment that was conducive to international trade and investment.Problem?Expansionary monetary policy was limited to a government’s supply of goldWhy was it abandoned in 1913?
History of the International Monetary SystemThe Inter-War Years & WWII (1914-1944)During this period, currencies were allowed to fluctuate over a fairly wide range in terms of gold and each otherIncreasing fluctuations in currency values became realized as speculators sold short weak currenciesThe US adopted a modified gold standard in 1934During WWII and its chaotic aftermath the US dollar was the only major trading currency that continued to be convertibleBretton Woods Systerm and the International Monetary Fund (IMF) (1944)Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire.The purpose was to design a postwar international monetary system.The goal was exchange rate stability without the gold standard.The result was the creation of the IMF and the World Bank.The International Monetary Fund:A key institution in the new international monetary systemHelp countries defend their currencies against cyclical, seasonal, or random occurrences Assist countries having trade problems if they promise to take adequate steps to correct these problemsThe World BankHelped fund post-war reconstruction and has since then supported general economic developmentFixed Exchange Rates (1945-1973)The currency arrangement worked fairly well during the post-WWII era of reconstruction and growth in world tradeProblem?Central banks held dollars as the main reserve currency.US suffered from a consistent and growing balance of payments deficit, which threatened the value of dollar.Lack of confidence in the ability of the US made foreign countries to convert dollar into gold.President Nixon announced to suspend official purchases or sales of gold by the US Treasury on August 15, 1971.Devaluations of the dollarThe Flexible Exchange Rate Regime: 1973-PresentFlexible exchange rates were declared acceptable to the IMF members.Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.Gold was abandoned as an international reserve asset.There have been numerous, significant world currency events over the past 30 yearsFree Float Exchange Rate SystemAbout 33 countries allow market forces to determine their currency’s value.Managed Float Exchange Rate SystemAbout 46 countries combine government intervention with market forces to set exchange rates.E.g., Brazil, South Korea, Russia#p#分页标题#e#美国留学生金融货币essay
Pegged Exchange Rate SystemConventional PegExchange rate publicly fixed to another currency or basket of currencies.e.g., Mexico (1994), China (1996-2005), Jordan, BarbadosCrawling PegLike the conventional peg, but the crawling peg is adjusted in small amounts at a fixed rate of change or in response to changes in macro indicators.e.g., Bolivia, Iraq, and Nicaragua
Currency BoardA currency board exists when a country’s central bank commits to back its monetary base – its money supply – entirely with foreign reserves at all times.e.g., Hong Kong, Argentina(1991-2022)This means that a unit of domestic currency cannot be introduced into the economy without an additional unit of foreign exchange reserves being obtained first.Argentina moved from a managed exchange rate to a currency board in 1991In 2002, the country ended the currency board as a result of substantial economic and political turmoilNo national currencySome countries do not bother printing their own currency. One attraction is that sound monetary and exchange-rate policies no longer depend on the intelligence and discipline of domestic policymakers. Dollarization Panama has used the dollar as its official currency since 1907Ecuador replaced its domestic currency with the US dollar in September, 2000“Euro”nizationMontenegro and San Marino The International Monetary Fund classifies all exchange rate regimes into eight specific categoriesExchange arrangements with no separate legal tenderCurrency board arrangementsOther conventional fixed peg arrangementsPegged exchange rates within horizontal bandsCrawling pegsExchange rates within crawling pegsManaged floating with no pre-announced pathIndependent floating Arguments in favor of flexible exchange rates:Easier external adjustments.National policy autonomy.Arguments against flexible exchange rates:Exchange rate uncertainty may hamper international trade.No safeguards to prevent crises.Arguments in favor of fixed exchange rates:stability in international pricesinherent anti-inflationary nature of fixed pricesArguments against fixed exchange rates :Need for central banks to maintain large quantities of hard currencies and gold to defend the fixed rateFixed rates can be maintained at rates that are inconsistent with economic fundamentals
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