国际金融英文版

1、Chapter 4International Monetary SystemDefinition of the International Monetary SystemnInternational monetary system is a set of conventions, rules, procedures and institutions that govern the conduct of financial relations between nations.nInternational monetary system is based on the exchange rate

2、system adopted by individual nations. The exchange rate system is a set of rules governing the value of a currency relative to other currencies.nThe centerpiece of the system is to select an international currency as a medium of exchange in international settlements.nCommodity money such as gold or

3、silver were widely used in history. Gold or silver were inconvenient to carry and impractical in settlement.nCommodity-backed money refers to the bank notes which are backed by gold or silver. The bank notes can be freely converted into gold or silver.nFiat money is inconvertible money that is made

4、legal tender by government decree. The only thing gives the money value is the faith placed in it by the people that use it.nAn international monetary system needs to solve the following problems: An international currency; The determination of the exchange rate; A mechanism of balance-of-payments a

5、djustment.The Classical Gold Standard (1876 1914)nThe gold standard was a commitment by participating nations to fix the price of their domestic currencies in terms of a specified amount of gold.nThe government announces the gold par value which is the amount of its currency needed to buy one ounce

6、of gold. Therefore, the gold was the international currency under the gold standard.Gold Standard and Exchange ValuesnPegging the value of each currency to gold established an exchange rate system. nThe gold par value determined the exchange rate between two currencies known as “mint par of exchange

7、”nSince each country has the gold par value, the exchange rate was then determined by the gold par value of each currency.nThe exchange rate was pretty stable because of the gold import and export point. The gold standard was regarded as “fixed exchange rate” system.nThe BOP disequilibrium was corre

8、cted by “Price-specie-flow mechanism”.Example of gold export and importnIf the gold par value in New Zealand was NZ$125/ounce and A$100/ounce in Australia, so mint par of exchange: 100/125 = A$0.80/NZ$ Costs of gold transportation: A$0.008/NZ$ The exchange rate would fluctuate between (0.80 + 0.008)

9、 = 0.8008 and (0.80 0.008) = 0.792n0.8008 and 0.792 are called gold export and import points.Price-specie-flow mechanism Rapid growth rate(tech innovation)Outputs increasePrices fallExports riseImports shrinkBOP surplusesGold inflowsMoney supply upPrices upExports declineImports increaseBOP deficits

10、Gold outflowsPerformance of the gold standardnLong-term price stability (lower inflation rate) 0.1% (1880 1914), 4.2% (1946 1990)nNo central bank needednVulnerable to real and monetary shocks Inflation in one country would influence prices, money supply and real income of another country. nHigher un

11、employment rate 6.8% (1879 1913), 5.6% (1946 1990)nHigher cost to maintain the system, in 1990 the cost would be $137 billion.nLimited supply of the gold can hamper the rapid growth of international trade and investment.The International Monetary System from 1914 to 1944nWorld War I interrupted trad

12、e and the free movement of gold.nMain countries suspended convertibility of gold. They also imposed embargoes on gold exports.nExchange rate were fluctuated over fairly wide ranges because of the predatory devaluation of the domestic currency. nGold exchange system were adopted. Other countries held

13、 gold, U.S. dollars or British pounds as reserves. U.S. and U.K. held gold. U.S. and U.K. traded gold only with foreign central banks, not private citizens.nFrom 1934 to the end of the War, countries adopted paper standard, the gold standard was virtually abandoned.nThe international trade and inves

14、tment declined to a historical low level with the protectionist policies adopted by many countries. Bretton Woods System (1944 1971)nBretton Woods Agreement was to design a new international monetary system.nInternational monetary fund (IMF) to lend to member countries experiencing a shortage of for

15、eign exchange reservesnThe International Bank for Reconstruction and Development (IBRD) (World bank) to finance postwar reconstructionnGATT (WTO) to promote the reduction of trade barriers and settle trade disputesnPegged exchange rate system US dollar was the international currency. Each country pe

16、gged the value of their currencies to the US dollar. US dollar was pegged to the gold. ($35/ounce) Parity band was within 1% on either side. The pegged value was adjustable.The Bretton Woods SystemThe value of the dollar was pegged to gold and the dollar was convertible to gold at the mint parity ra

17、te.A pegged exchange rate system in which a country pegs the value of its currency to the currency of another nation.In practice a dollar-exchange-rate system as nations pegged to the dollar and freely exchanged the domestic currency for the dollar at the parity rate. nTriffin dilemma The U.S. would

18、 neither run BOP surplus of deficits. If U.S. keeps BOP surplus, there would not be enough international currency for world trade and international investment. If U.S. has long term BOP deficit, people will lose the confidence to the dollar.nDecline of Bretton Woods system European and Japanese econ

19、omy grew fast. US dollars were being spent overseas, in the form of foreign aid, defense spending, trade, investment and tourism. nU.S. ran BOP deficits in 1960s. (capital account)nDollar crises (1965, 1968) Worsening situation in Vietnam Rumors the US intend to eliminate the gold reserve requiremen

20、t against deposits, notes French verbal attacks on the US dollar drastic increase in purchases of gold (1968)nGold pool closed in 1968.U.S. Balance of Payments1959 1973 ($ billions)nThe breakdown of the Bretton Woods system U.S. suspended the convertibility of the dollar into gold in 1971. An emerge

21、ncy 10% tariff on all US imports Price and wage controls to stabilize inflation Those measures officially broke off the link between the U.S. dollar and the gold. The Bretton Woods system was callapsed. nSmithsonian agreement (Dec. 1971) G-10 met in Smithsonian Institute in December 1971 to reach th

22、e agreement. Devalue dollar against gold ($35 to $38) Revalue other currencies against dollar (8%) Parity band widened (1% to 2.25%) U.S. remove 10% tariffnAfter the Smithsonian agreement, major currencies were allowed to fluctuate.nThe oil crisis and its aftermath In 1973, OPEC quadrupled the oil p

23、rice which had a huge impact on the world economy and effectively ended any hopes of restoring a fixed exchange rate system.nLDCs were hard hit both by high oil prices and recession in the industrialized countries.nOil importing countries such as Japan and UK suffered greatly from the shock.The real

24、 price of OPEC crude oilGlobal current account balances1973-80 ($ billions)Floating Exchange Rate System(1976 Now)nJamaica accord (1976) Jamaica accord in 1976 amended the IMF constitution and signified the start of the floating exchange rate era. Floating rates were declared acceptable. Gold was ab

25、andoned as a reserve asset. Total annual IMF quotas were increased to $41 billion. (in 2008, $311 billion)nPlaza agreement (1985) G-5 jointly intervened the foreign exchange market to pull the value of the dollar down.nLouvre accord (1987) G-7 declared to cease to drive down the value of the dollar

26、since they felt that the dollar had depreciated far enough.nThe two events showed the floating exchange rate system was more like a managed (dirty) floating rate instead of a freely (clean) floating rate system.The nominal and real effective exchange rate of the dollar, 1980 2005 The creation of the

27、 EuronThe 1991 Treaty of Maastricht The timetable for the introduction of the euro: January 1, 1999. The euro replaced the ECU. January 1, 2002. The euro began public circulation alongside national currencies. July 1, 2002. The euro formally replaced the currencies of participating countries.Converg

28、ence criterianCountries that were qualified to adopt euro should meet convergence criteria:nInflation rates should be within 1.5% of the three members of the EU with the lowest inflation rates during the previous year.nLong-term interest rates should be within 2% of the three members of the EU with

29、the lowest interest rates.nBudget deficits should be no higher than 3% of gross domestic product.nGovernment debt should be less than 60% of gross domestic product.nOnly 11 member countries of the EU met the criteria when the euro was introduced. Now there are 16 countries.nThe performance of the eu

30、ro (against the dollar).The Dollar/Euro Spot Exchange Rate, 1990 2007 (Monthly Average)Currency Crises post - 1990nThe Mexican peso crisis of 1995 The peso lost 40% of its value against the dollar. Stock market fell 50% of its value.nThe Asian financial storm of 1997 Thailand: baht lost 50% of its v

31、alue. Indonesia: rupiah lost 75% of its value. South Korea: won lost 44% of its value.nThe fall of the Russian ruble in 1998 Russia defaulted on more than $40 billion of debt and was forced to abandon pegged rate.n2002 Argentina peso crisis Argentina was forced to devalue the peso and allowed the pe

32、so to float.Exchange Rate Arrangements TodayA nations policymakers may choose any type of exchange rate system.Hence, there is a wide range of arrangements in place at this time.Exchange Rate Systems in PracticenCrawling peg is an exchange rate system in which a country pegs its currency to another

33、currency, but allows the parity value to change at regular time intervals. It can help eliminate some sudden currency attacks.nMexico, Nicaragua and others used to adopt the crawling peg system. NicaraguaNicaraguas crawling-peg exchange-rate arrangement allows for a 1 percent monthly rate of crawl o

34、f depreciation of the cordoba relative to the U.S. dollar.nCurrency baskets refer to peg a currency to a weighted average of a number of foreign currencies. The weighted average of a basket of currencies is likely to be less variable than the exchange rate of a single currency.nCurrency board is an

35、exchange rate system in which the monetary authority issues notes and coins convertible into a foreign anchor currency at a truly fixed rate and on demand.nThe currency board supplies currency on the basis of 100% foreign reserves.nFor example, if the monetary authority in Hong Kong issues one Hong

36、Kong dollar, it must have the equivalent U.S. dollar. Suppose the exchange rate is HK$7.50/$, it implies that for each Hong Kong dollar issued, the monetary authority must keep $0.13 (1/7.5). nCurrency board eliminates the possibility of a nations money supply growing too rapidly and causing inflati

37、on. nDollarization (Euroization) means that a country use the currency of another nation to serve as legal tender. For some countries it is an effective way to reduce risk and protect against inflation and devaluation.nAdvantages of the dollarization (1) Avoid speculative attacks on the local money (2) Reduce country risk, create positive investor sentiment and more stable capital market. (3) Improve the global economy by allowing for easier integration of economies into the worlds market.nDisadvantage of dollarization (1) The central bank loses the ability to administer monetary poli