Tài chính doanh nghiệp - Chapter 11: The global trade and investment environment

Brief history of the international monetary system Gold Standard; the Bretton Woods System; the Floating Exchange rate system The Gold Standard The Bretton Woods system (1944); fixed exchange rate system The floating exchange rate system

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FIXED EXCHANGERATESF L O A T I N G RATESI M FSDRE M SChapter 11: The Global Trade and Investment Environment Lecture Plan:Brief history of the international monetary systemGold Standard; the Bretton Woods System; the Floating Exchange rate systemThe International Monetary SystemThe Gold StandardThe Bretton Woods system (1944); fixed exchange rate systemThe floating exchange rate systemThe Gold Standard systemUnder the gold standard, countries pegged their currency to gold . At one time, for example, the US government would agree to exchange one dollar for 23.22 grains of gold (1 ounce=480 grains)The exchange rate between currencies was determined based on how much gold a unit of each currency would buy.The gold standard worked fairly well until the inter-war years and the Great Depression. Following competitive devaluations (eg for export support), people lost confidence in the system and started to demand gold for their currency. The Bretton Woods system(1944)Provided for two multinational institutions : the IMF and the World Bank.The US dollar was to be pegged and convertible to gold, and other currencies would set their exchange rates relative to the dollar.A country could not devalue the currency by more than 10% without IMF approval. fixed exchange rates were to force countries to have greater monetary discipline.Some flexibility through the use of short term funds from the IMF to help support currencies during temporary pressures for revaluation.The Bretton Woods system (1944)A key problem with the gold standard was that there was no multinational institution that could stop countries from engaging in competitive devaluations. The Bretton Woods system provided for two multinational institutions - the IMF and the World Bank.The US dollar was to be pegged and convertible to gold, and other currencies would set their exchange rates relative to the dollar. Devaluations were not to be used for competitive purposes. The Bretton Woods system (1944)The system also provided some flexibility, and could use short term funds from the IMF to help support currencies during temporary pressures for revaluation.The World Bank's (IBRD) major purpose was to provide funds to help in the reconstruction of Europe and the development of third world economies. The collapse of the fixed exchange rate systemThe fixed exchange rate system established in Bretton Woods collapsed mainly due to the economic management of the USA (Vietnam war fiscal crisis) Speculation that the dollar would have to be devalued relative to most other currencies forced other countries to increase the value of their currency relative to the dollar. The Bretton Woods system relied on an economically well managed US. When the US began to print money, run high trade deficits, the system was strained to the breaking point.Fixed versus Floating exchange ratesFloating rates are claimed to give countries autonomy regarding their monetary policy facilitate smooth adjustment of trade imbalancesFixed exchange rates are claimed to:impose monetary discipline on a countryavoid speculative pressuresprovide more stability to international trade and investmentpromote more stable pricesDistribution of IMF Members’ Foreign Exchange Arrangements (182) by type as a % of total,1998CASE:The Australian exchange rate systemFixed exchange ratesPegged to the Pound sterling (prior to Dec. 1971)Pegged to the US Dollar (Dec. 1971-Sept.1974)Pegged to a TWI* (Sept. 1974-Nov. 1976)Managed float (TWI + Government):Nov.1976-Dec.1983Independently Floating Exchange Rates:Since Dec. 1983, with some RBA intervention (“the dirty float”)* TWI =Trade Weighted IndexExchange Rates in practice -Pegged exchange rates-Pegged exchange rates are popular among the world’s smaller nations, as they peg their exchange rate to that of other major currencies. There is some evidence that a pegged exchange rate regime does moderate inflationary pressures in a country.Exchange Rates in practice - Currency boards-A Currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal, at the fixed exchange rate, to at least 100% of the domestic currency issued. “Dollarisation”Involves completely replacing the local currency with a foreign currency(e.g. the US dollar).Disadvantage:Monetary conditions are almost completely controlled by the foreign central bank(for instance, the U.S. Federal Reserve)The European Monetary SystemObjectives :1) create a zone of monetary stability in Europe, 2) control inflation, and 3) to coordinate exchange rate policies with third currencies.The ECU: a basket of currencies that served as the unit of account for the EMS. Each national currency was given a central rate vis-à-vis the ECU. From this central rate flow a series of bilateral rates. Currencies were not allowed to depart by more than 2.25% from their bilateral rate with another EMS The EUROBenefits:significant savings for businesses and individualseasier comparability of prices; more competitionboost to the development of a highly liquid pan-European capital marketmore investment options Drawbacks:national authorities lose control over monetary policyEU is not an “optimal currency area”The European Central Bank(ECB)Implements the monetary policy in the Euro-zoneIn January 1999, the ECB assumed responsibility for union-wide monetary policy in the 11 countries of the euro-zone forming the European Monetary Union(Greece joined later).Conflicts between member-countries with low inflation and members with high inflation.A second major concern is whether each member country will be able to use its national fiscal policy effectively to improve its performance..Changes in the role of the International Monetary Fund(IMF)With the introduction of the floating rate system and the emergence of global capital markets, much of the original reason for the IMF's existence have disappeared. New role: helping third world countries out of their debt crisis's. 1995:Mexico1997: Thailand,Indonesia,South KoreaCriticism of the IMFA “one size fits all” policyBut E.Asia is not the same with Mexico.Debt in E.Asia was mainly private, while in Mexico was mainly government .The IMF creates a moral hazard since people and governments believe that the IMF will bail them out, they undertake overly risky investments. the IMF has become too big and does not have enough accountability for its actions.Overall, still extremely helpful to many countries.Australia’s Position in International Trade 1980, 2000 IndicatorsRank 1980Rank 2000% of World2000Merchandise exports18251.0Merchandise Imports19201.1Services exports23211.2Services Imports14221.2