1. Monetary System
This is a test

2. Monetary System
Relationship between monetary system and foreign exchange rates
Historical development
Fixed vs floating exchange rates
Role of the IMF and World Bank
Implications for managers

3. International Monetary System
Currency exchange rates depend on the structure of the international monetary system
In 2003 of all IMF members currencies
Only 19% were free floating
25% were managed float
8% were adjustable peg
22% were fixed peg
4% were fixed by a currency board
22% were not currency of their own (use Euro, US Dollar)

5. Evolution of the International Monetary System
Gold Standard: currencies pegged to gold value
Convertibility guaranteed
By 1880 most on gold standard
Balance of trade equilibrium for all countries
Value of exports should equal value of imports
Flow of gold used to make up differences
Abandoned in 1914
Failed resumption after WWI
Great Depression

6. Bretton Woods ( )
44 countries met to design a new system in 1944
Established: International Monetary Fund (IMF) and World Bank
IMF: maintain order in monetary system
World Bank: promote general economic development
Fixed exchange rates pegged to the US Dollar
US Dollar pegged to gold at $35 per ounce
Countries maintained their currencies ± 1% of the fixed rate; buy/sell own currency to maintain level

7. The Role of the IMF IMF maintained exchange rate 187 members by 2003
discipline
National governments had to manage inflation through their money supply
flexibility
Provides loans to help members states with temporary balance-of-payment deficit;
Allows time to bring down inflation
Relieves pressures to devalue
Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies
Allowed to 10% devaluations and more with IMF approval
187 members by 2003

8. The Role of the World Bank
World Bank (IBRD) role (International Bank for Reconstruction & Development)
Refinanced post-WWII reconstruction and development
Provides low-interest long term loans to developing economies
The International Development Agency (IDA), an arm of the bank created in 1960
Raises funds from member states
Loans only to poorest countries
50 year repayment at 1% per year interest

9. Collapse of Bretton Woods
Devaluation pressures on US dollar after 20 years
Lyndon Johnson policies
Vietnam war financing
Welfare program financing
Nixon ended gold convertibility of US dollar in 1971
US dollar was devalued and dealers started speculating against it for further devaluation
Bretton Woods fixed exchange rates abandoned in January 1972

10. Jamaica Agreement 1976 Floating rates declared acceptable
Gold abandoned as reserve asset;
IMF returned gold reserves to members at current prices
Proceeds placed in trust fund to help poor nations
IMF quotas – member country contributions – increased; membership now 182 countries
Less-develop, non-oil exporting countries given more access to IMF
IMF continued its role of helping countries cope with macroeconomic and exchange rate problems

11. Case for Floating Exchange Rates The Case for Fixed Exchange Rates
Monetary policy autonomy
Trade balance adjustments helped
The Case for Fixed Exchange Rates
Monetary discipline
Speculation limited
Uncertainty reduced
Trade balance adjustment effects on inflation controlled
Who is right?

12. Recent Activities and the IMF
Mexican Crisis 1995
Russian Ruble crisis1995
Asian crisis 1997/1998
Events
The investment boom
Excess capacity
The debt bomb
Expanding imports
The crisis
How does the IMF achieve results?
Inappropriate policies?
Moral Hazard?
Lack of accountability?

13. Managerial Implications
Currency management
Currency market does not always work as expected
Government intervention
Speculative activity
Business strategy
Movements in exchange rates are difficult to predict
Forward market is imperfect predictor of exchange rate movements
Forward exchange rate market covers risk for months not years
Maintenance of strategic flexibility required
Disperse manufacturing
Outsource
Corporate-government relations