Description
It explains international monetary system and also the standards.
INTERNATIONAL MONETARY SYSTEM
• We are in an integrated world economy • Exchange risk • Market imperfections • Multiple opportunites
• International Monetary System is an Institutional Framework where
– International Payments are effected – Capital movements are accommodated – Exchange Rates among currencies are determined
• Evolution of the Monetary System
– – – – – Pre 1875 – age of bimetallism 1875 – 1914 ( Classical Gold Standard ) 1914 – 1944 1945 – 1972 1973 onwards
• • • • • •
Great Britain established gold standard in 1821. France formally adopted the standard in 1878. Germany converted to gold standard in 1875. US adopted gold standard in 1879. Russia & Japan in 1897. International Gold Standard – 1875 – 1914
• Price Specie flow mechanism • Gold Standard Pre-requisites :
1. Monetary authority guarantees to buy /sell gold at a fixed price without any limit. 2.Melting gold / gold coins freely allowed. 3. Import / Export of gold freely allowed. 4. Total money supply depends on quantum of gold available for monetary purposes.
• Collapse of Gold Standard in August 1914. • Great Britain, France, Germany & Russia imposed embargoes on gold export and suspended redemption of bank notes in gold. • Countries suffered hyperinflation • Inter war Period - a period of economic & political unstabilities, bank failures and panicky flights of capital across borders. • „Beggar thy neighbour? approach. Detrimental effects in International Trade and Investment.
• Bretton Woods – 1945 – 1972. • Exchange Rate Stability without restoring international gold standard. • Par value in relation to US Dollar • Triffin Paradox. • Creation of SDR in 1970. • August 71 - Convertibility of Dollar into Gold suspended.
• March 73 – • European and Japanese currencies were allowed to float. • Decline and fall of Bretton Woods.
• •
1.
Flexible Exchange Rate Regime 1973 Jamaica Agreement – January 1976.
Flexible exchange rates were declared acceptable to the IMF members. Central Banks were allowed to intervene in the exchange markets to smoothen unwarranted volatilities. Gold was officially abandoned as an international reserve asset. Non-Oil exporting and LDCs were given greater access to IMF fund. IMF assistance to countries facing BOP and Exchange Rate difficulties on conditions Managed float
2. 3.
• •
1. 2. 3.
European Monetary System – March 1979. Objectives :To establish „Zone of monetary stabilizing? in Europe. To co-ordinate exchange rate policies vis-à-vis the non-EMS countries. To finally aim at European Monetary Union.
•
Two main instruments of the EMS
– – ECU ERM
• • • •
ECU – “BASKET” Currency ERM Maastrict treaty (Dec 1991) Members of EU agreed to closely align their fiscal, monetary and exchnage rate policies. • Each menber country agreed to :
– – – – Confine the ratio of budget deficit to GDP below 3% Gross Public debts below 60% of GDP. Ensure strong price stability. Maintain currency within the prescribed exchange rate change of ERM.
Advent of Euro
• January 1, 1999 – with the launch of euro, European Monetary Union was created. • Each national currency of the euro -11 countries was irrevocably fixed to the euro at a conversion rate as of Jan1,99. • On Jan 1, 2002, euro currency notes and coins were introduced into circulation. Euro became the sole legal tender in the euro-12 countries.
• Euro – 13 Austria, Belgium, Finland, France, Germany,Ireland,Italy,Luxembourg, The Netherlands,Portugal, Spain,Greece and Slovenia
European Central Bank
• Monetary policy for the euro-12 countries is conducted by the European Central Bank. • Primary objective : Price Stability. Independence of ECB legally guaranteed. Inflation rate of <2% • European System of Central Banks (ESCB)
European System of Central Banks
• 1. To define and implement the common monetary policy of the Union • 2. To conduct foreign exchange operations • 3. To effectively manage the official foreign reserves of the euro member states
1 EURO IS EQUAL TO : Australlian Schilling Belgian Franc Dutch guilder Finnish markka French franc German Mark Irish punt Italian lira Luxembourg franc Portuguese escudo 13.7603 40.3399 2.20371 5.94573 6.55957 1.95583 0.78756 1936.27 40.3399 200.482
Spanish peseta
U.S. Dollar* Japanese Yen* Special Drawing Rights (SDR)*
166.386
0.9791 116.37 0.7357
•Represents the market exchange rates of August 9, 2002 •Source : The Wall-Street Journal
doc_787875511.ppt
It explains international monetary system and also the standards.
INTERNATIONAL MONETARY SYSTEM
• We are in an integrated world economy • Exchange risk • Market imperfections • Multiple opportunites
• International Monetary System is an Institutional Framework where
– International Payments are effected – Capital movements are accommodated – Exchange Rates among currencies are determined
• Evolution of the Monetary System
– – – – – Pre 1875 – age of bimetallism 1875 – 1914 ( Classical Gold Standard ) 1914 – 1944 1945 – 1972 1973 onwards
• • • • • •
Great Britain established gold standard in 1821. France formally adopted the standard in 1878. Germany converted to gold standard in 1875. US adopted gold standard in 1879. Russia & Japan in 1897. International Gold Standard – 1875 – 1914
• Price Specie flow mechanism • Gold Standard Pre-requisites :
1. Monetary authority guarantees to buy /sell gold at a fixed price without any limit. 2.Melting gold / gold coins freely allowed. 3. Import / Export of gold freely allowed. 4. Total money supply depends on quantum of gold available for monetary purposes.
• Collapse of Gold Standard in August 1914. • Great Britain, France, Germany & Russia imposed embargoes on gold export and suspended redemption of bank notes in gold. • Countries suffered hyperinflation • Inter war Period - a period of economic & political unstabilities, bank failures and panicky flights of capital across borders. • „Beggar thy neighbour? approach. Detrimental effects in International Trade and Investment.
• Bretton Woods – 1945 – 1972. • Exchange Rate Stability without restoring international gold standard. • Par value in relation to US Dollar • Triffin Paradox. • Creation of SDR in 1970. • August 71 - Convertibility of Dollar into Gold suspended.
• March 73 – • European and Japanese currencies were allowed to float. • Decline and fall of Bretton Woods.
• •
1.
Flexible Exchange Rate Regime 1973 Jamaica Agreement – January 1976.
Flexible exchange rates were declared acceptable to the IMF members. Central Banks were allowed to intervene in the exchange markets to smoothen unwarranted volatilities. Gold was officially abandoned as an international reserve asset. Non-Oil exporting and LDCs were given greater access to IMF fund. IMF assistance to countries facing BOP and Exchange Rate difficulties on conditions Managed float
2. 3.
• •
1. 2. 3.
European Monetary System – March 1979. Objectives :To establish „Zone of monetary stabilizing? in Europe. To co-ordinate exchange rate policies vis-à-vis the non-EMS countries. To finally aim at European Monetary Union.
•
Two main instruments of the EMS
– – ECU ERM
• • • •
ECU – “BASKET” Currency ERM Maastrict treaty (Dec 1991) Members of EU agreed to closely align their fiscal, monetary and exchnage rate policies. • Each menber country agreed to :
– – – – Confine the ratio of budget deficit to GDP below 3% Gross Public debts below 60% of GDP. Ensure strong price stability. Maintain currency within the prescribed exchange rate change of ERM.
Advent of Euro
• January 1, 1999 – with the launch of euro, European Monetary Union was created. • Each national currency of the euro -11 countries was irrevocably fixed to the euro at a conversion rate as of Jan1,99. • On Jan 1, 2002, euro currency notes and coins were introduced into circulation. Euro became the sole legal tender in the euro-12 countries.
• Euro – 13 Austria, Belgium, Finland, France, Germany,Ireland,Italy,Luxembourg, The Netherlands,Portugal, Spain,Greece and Slovenia
European Central Bank
• Monetary policy for the euro-12 countries is conducted by the European Central Bank. • Primary objective : Price Stability. Independence of ECB legally guaranteed. Inflation rate of <2% • European System of Central Banks (ESCB)
European System of Central Banks
• 1. To define and implement the common monetary policy of the Union • 2. To conduct foreign exchange operations • 3. To effectively manage the official foreign reserves of the euro member states
1 EURO IS EQUAL TO : Australlian Schilling Belgian Franc Dutch guilder Finnish markka French franc German Mark Irish punt Italian lira Luxembourg franc Portuguese escudo 13.7603 40.3399 2.20371 5.94573 6.55957 1.95583 0.78756 1936.27 40.3399 200.482
Spanish peseta
U.S. Dollar* Japanese Yen* Special Drawing Rights (SDR)*
166.386
0.9791 116.37 0.7357
•Represents the market exchange rates of August 9, 2002 •Source : The Wall-Street Journal
doc_787875511.ppt