the international monetary system

International finance 120181-1165

The international monetary system


Lecture outline

The notion and the functions of the IMS

Gold standard system

The gold bullion standard

The Bretton Woods system


IMS definition

A set of rules, procedures, instruments and

institutions which are necessary to settle

international payments

Source: A. Budnikowski, Międzynarodowe stosunki gospodarcze, PWE, Warszawa 2006.


The reasons for the creation of IMS

The necessity of international economic

cooperation

The efficiency of the international payment

system

Facilitation of international trade

Facilitation of international capital flow


IMS functions

Ensuring international money supply

Ensuring international liquidity

Ensuring a global payment equilibrium

Creating a framework for the national economic

policy

Contributing to international economic

stabilisation


International money

Unit of account

Medium of exchange

Store of value


International money

L. Oręziak, Euro nowy pieniądz, PWN, Warszawa 2002.

Private transactions

Official transactions Function

Price quotation Reference currency Unit of account

Transaction currency Intervention currencyMedium of exchange

Investment currency Reserve currency Store of value


International money

Criteria Large share in global exports

Credibility concerning the value of the currency

A well developed financial market


International money

Main international currencies USD, EUR, JPY

Transaction function USD 84%, EUR 39%, JPY 19%

Reference function USD- 69 państw, EUR- 40 państw

Reserve currency USD 63,9% EUR 26,5%, GBP 4,7%

Source: BIS, IMF


International liquidity

A stock of assets enabling settling international

payments

An appropriate level and quality of reserves

Reserves- assets held by the monetary

authority, which may serve to reinstate the

external equilibrium


International liquidity

Reserves types Foreign currency

Gold

SDR (special drawing rights)


Reserves structure (bln USD)

Source: IMF


Global payment equilibrium

Tools enabling balance of payments

adjustments

Automatic mechanisms

Adjustment policy


Global payment equilibrium

BP surplus China 296 bln USD, Germany 131 bln USD, Japan

110 bln USD

BP deficit USA, -380 bln USD, Spain -70 bln USD

Source: IMF


Framework for the national economic policy

External and internal equlibrium

IMF

Measures to reinstate the BP equilibrium


Stabilisation of the international economy

ER volatility

Various ER regimes

The role of reserves


Currency convertibility

The legaly established possibility to

convert freely the national currency for any

foreign currency and vice versa at a single

ER



Internal convertibility

External convertibility

Unlimited convertibility


The gold standard

1870-1914

Creation of the world economy the necessity to create an IMS

The main goal- maintaining the external equilibrium


The gold standard

Main rules:

Fixed ER at the level of the mutual gold parity of

two currencies

The amount of money in circulation strictly

depends on the stock of gold reserves

BP imbalances adjusted through gold flows


The gold standard

The mechanism:

BP deficit

outflow of gold reserves

decrease of money supply

decrease of national prices

increase of exports, decrease of imports

BP equilibrium reinstated


The gold standard

Fast BP adjustments +

Low ER volatility + Scarce set of measures enabling the reinstatement

equilibrium - The internal equilibrium subordinated to the external

eqilbrium -

Deficit countries bear the burden of adjustments -



1918-1939

No convertibilty of money to gold

Gold served the purpose of equilbrium

adjustments



Great depression 30-ties

Protectionism

Economic desintegration



1944-1971

Endavour to reconcile the external and

internal equilibrium

IMF and World Bank



Rules:

Fixed ER versus USD

Fixed price of gold in USD

Official foreign reserves- gold and USD



IMF The possibility to adjust ER

Member quotas

Loans




Liberalisation of capital flow

Growing economic integration

Speculative capital flows



The problem of the US external

equilibrium

The necessity to hold large gold reserves

The credibility problem



Fiscal expansion in the USA inflation

terms of trade deterioration BP

deterioration

Expansionary monetary policy of the FED

Speculation on USD depreciation

A two-level gold market


The breakdown of the Bretton Woods system

1970- recession in the USA the

necessity to devalue USD

1971- suspension of USD convertibilty to

gold

Revaluation of the other currencies

The Smithonian agreement


The breakdown of the Bretton Woods system

Intensive speculative attacks on USD

The necessity to close the currency

market

Floating ER


The Bretton Woods system- an assessment

Stabilisation throughout 20 years

International money supply ensured

ER stability ensured


The Bretton Woods system- an assessment

Insufficient international liquidity

The internal equilibrium subordinated to

the external eqilbrium

Changing economic environment


After Bretton Woods

Floating ER- Kingston 1976

Expanded international liquidity

The foundations of the contemporary IMS


Summing up

IMS functions

IMS evolution

The Bretton Woods system rules

The reasons for the breakdown of the

Bretton Woods system


References

P. Krugman, M.Obstfeld, International economics: theory and

policy., Pearson, Addison Wesley, Boston 2009 E. Truman, The International Monetary System and Global

Imbalances, IMF conference paper 2010 P. Clark, J. Polak, International liquidity and the role of SDR in the

International Monetary System, IMF Working Paper, 2002 A. Kester, International reserves and foreign currency liquidity, IMF,

2001

the international monetary system

Documents

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international moneyl

international payments

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bln usd bp deficitusa

pastwreserve currency

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