International Monetary System- A Primer

INTERNATIONAL MONETARY SYSTEM Presentation by A.V. Vedpuriswar

INTRODUCTION International Trade - Barter Bond issues to finance infrastructure projects in developing countries (19th century) Gold Standard (1879 - 1934) Bretton Woods (1944 - 1971) 1960s: Decline of U.S Economy 1971: Devaluation of Dollar Managed / Dirty float

America,Germany first to free capital flows Britain, 1979, Japan, 1980 (mostly) France, Italy removed restrictions in 1990 Currency Board in Hong Kong Dollarisation Creeping peg in Brazil The Euro The rise of China

Forex Markets  Players : Individuals, corporate banks, central banks and securities firms  95 % of trading between banks  More than 97 % or trading is speculative  Trading almost around the clock  Dealing room  Reuter’s screen  Society for Worldwide Interbank Financial Telecommunication, Sophisticated electronics technology.

GLOBAL FOREX TRADING • Auckland • Sydney • Tokyo • Singapore • Frankfurt

Zurich Paris London New York

• Peak trading during European waking hours • New York most active when Europe is open • During afternoon, New York becomes more volatile • Worst time to trade - after New York closes but Sydney has not opened

Currencies : ISO Codes Code Currency

Currency Code Aus $ Aus Schilling JPY Belgian Franc NZD Sterling Can $ Dan Kr Deutsche Mark Dutch Guilder ESP French Franc

AUH ATS BEF

Italian Lira ITL Japanese Yen New Zealand Dollar

GBP CAD

Norway Krone Portugese Escudo PTE DKK Saudi Riyal DEM Singapore $ NLG Spanish Peseta FRF

Swedish Kroner

NOK SAR SGD

SEK

COUNTRY’S CHOICE OF EXCHANGE RATE SYSTEM Openness : Relatively closed economies may find it difficult to correct external imbalances using domestic policies. They would prefer flexible exchange rates. On the other hand, open economies would prefer fixed exchange rates. Size : Small countries tend to prefer fixed exchange rates. Economic policy can be tailored to meet the needs of the economy as a whole. In a diversified large economy,

Export dependence on a few commodities Fixed exchange rate preferable. Otherwise disruptive effect on economy

Capital A/C Convertibility Heavy inflows and outflows of capital create considerable difficulties in maintaining fixed exchange rate

Exchange Rate regimes (Q1, 1998) Fixed : Managed floating : Independently floating : Others :

35.7% 29.7% 25.3% 9.3%

A NEW FINANCIAL ARCHITECTURE 1994- Mexican Peso crisis 1997- Asian currency crisis 1998- Brazil/Russia Basic issues * weak financial systems * poor supervision and regulation * too much short term borrowing * false security of stable exchange rates * once crisis struck, contagion effects because of interconnected financial markets

Basic objectives of policy makers continuing national sovereignty globally regulated financial markets benefits of global capital markets Ideas being suggested reintroduction of capital controls creation of global central bank world currency global financial regulator remove IMF due to moral hazard

Practical suggestions • improve disclosure norms • put pressure for introducing bankruptcy laws Floating exchange rates can overshoot but allow country to retain independence as far as monetary policies are concerned . This freedom is however more limited than it looks prima facie. Fixed rates mean subservience to monetary policies of another country Emerging scenario- Two groups of countries • Flexible exchange rates , relatively low level of integration into global capital markets • Fixed exchange rates- Tightly integrated into global capital markets, foreign ownership, Euro or dollar zones

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