Understanding the International Monetary System
McGraw-Hill/Irwin International Business, 11/e Copyright 2008 The
McGraw-Hill Companies, Inc. All rights reserved. chapter five
Slide 3
5-3 Learning Objectives Explain the functioning of the gold
standard Describe the purposes of the IMF Appreciate the
accomplishments of Bretton Woods system and the ensuing
developments shaping the world monetary system Describe the purpose
of the World Banks Discuss the purpose of the Bank for
International Settlements
Slide 4
5-4 Learning Objectives Discuss the floating exchange rate
system Describe the development of the euro Explain the role of the
Balance of Payments (BOP) Discuss the major BOP accounts Explain
the use of Special Drawing Rights (SDRs)
Slide 5
5-5 Gold Standard The use of gold at an established number of
units per currency Bretton Woods The New Hampshire town where
treasury and central bank representatives met near the end of World
War II to establish the IMF, the World Bank, and the gold exchange
standard
Slide 6
5-6 International Monetary Fund International Monetary Fund
(IMF) Institution that coordinates multilateral monetary rules and
their enforcement Triffin paradox The concept that a national
currency that is also a reserve currency will eventually run a
deficit, which eventually inspires a lack of confidence in the
reserve currency and leads to a financial crisis.
Slide 7
5-7 World Bank Institution that focuses on funding of
development projects Bank for International Settlements Institution
that is the central bank for central bankers
Slide 8
5-8 Currency Exchange Rate Systems Fixed currency exchange
rates Rates that governments agree on and undertake to maintain
Floating currency exchanges rates Rates that are allowed to float
against other currencies and are determined by market forces
Jamaica Agreement The 1976 IMF agreement that allows flexible
exchange rates among members
Slide 9
5-9 Current Currency Exchange Rate Arrangements Exchange
arrangements with no separate legal tender Currency board
arrangements Other conventional fixed peg arrangements Pegged
exchange rates within horizontal bands
Slide 10
5-10 Current Currency Exchange Rate Arrangements Crawling pegs
Exchange rates within crawling bands Managed floating with no
preannounced path for the exchange rate Independently floating
exchange rates
Slide 11
5-11 Euro Currency of the European Union (started on January 1,
2002) 12 EU members have joined the European Monetary Union
(Austria, Belgium, Finland, France, Germany, Greece, Ireland,
Italy, Luxemburg, the Netherlands, Portugal, Spain) The U.K. and
Switzerland maintain their currencies. Yet they accept euro in
transactions within their countries
Slide 12
5-12 BOP Accounts Table 5.1 Current account Records a countrys
exports and imports in goods and services Goods or merchandise
account Services account Unilateral transfers
Slide 13
5-13 BOP Accounts Capital account Records the net changes in a
nations international financial assets and liabilities Direct
investments Portfolio Investments Short-term capital flows Official
Reserves account Records the assets held by the government; gold,
foreign currencies, and accounts in foreign banks; a balance of the
countrys foreign currency
Slide 14
5-14 Table 5.1 U.S. International Transactions (millions of
dollars)
Slide 15
5-15 Special Drawing Rights Special Drawing Rights (SDR) An
international reserve asset established by the IMF (1970) The unit
of account for the IMF and other international organizations SDR
value based on a basket of 5 currencies: US$ (45%), Euro (29%), Yen
(15%), and pound sterling (11%) SDR is more stable than any other
currencies such that it is used in international transactions