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CONTENTS AND PURPOSE 1.Basic Elements of the International Monetary System 2.Mechanisms for Establishing a Consistent International Monetary System purpose: podati konceptualne osnove, ki so potrebne za proučevanje mednarodnega denarnega sistema Page 2

1.Basic Elements of the International Monetary System International monetary system = system of rules, mechanism and institutions that connects the national monetary systems into a consistent whole Role of the international monetary system: ensure exchange rate stability facilitate balance-of-payments disequilibria correction ensure access to international liquidity Page 3

solutions for the acceleration of the size of the international goods and capital flows? distribution of the benefits from these flows? Page 4 1. Basic Elements of the International Monetary System balance-of-payments adjustments international liquidity facilitation consistency of the system and confidence

Balance-of-Payments Adjustments long-run equilibrium in the current account! neoclassical view and realistic circumstances in the world economy: validity of the automatic elimination of the balance-of- payments disequlibria assumption? analysis of the balance-of-payments disequilibrium emergence? difference in different groups of economic agents? Page 5 balance-of-payments disequilibria elimination process

International Liquidity Facilitation definition of international liquidity two segments: international liquidity under the ownership of the central bank Page 6 foreign exchange reserves of the CB gold unused gold tranche at the IMF Special Drawing Rights (SDR)

International Liquidity Facilitation international liquidity under the ownership of all other agents in the economy: operative foreign exchange reserves of commercial banks foreign exchange assets of non-banking subjects abroad short-term foreign assets of the residents long-term, prenosljive foreign bonds of the residents possibilities of the banks to get credits for financing balance-of-payments deficit abroad Page 7  sources of financial assets to increase IMR: privatni sources of capital public sources of capital

Consistency of the System and Confidence relevance of the mechanism for the elimination of balance-of-payments disequilibria appropriateness of the size of the international liquidity Page 8  n-1 countries can decide independently on their balance- of-payments balance: n-th country accepts the balance that is determined by all the other countries in the system establishment of a mechanism for the coordination of the balance-of-payments goals

2. Mechanisms for Establishing a Consistent International Monetary System Page 9 automatic adjustment mechanism n-1 system international coordination system monetary union system

Automatic Adjustment Mechanism changing the level of foreign exchange supply and demand: flexible exchange rate: Page 10 deficit domestic currency depreciation  D for &  S of foreign exchange balance-of-payments equilibrium

Automatic Adjustment Mechanism fixed exchange rate: through price changes through changes in aggregate expenditures Balance-of- payments deficit Fall in aggregate expenditures Fall in supply of money Lower rate of inflation Multiplier Decrease in GDP Improved competitiveness relative to other countries Price elasticities Marginal propensity to import Decrease in domestic demand Decreased imports Increased exports Decreased imports Increased exports Decrease in the deficit

n-1 System n-th country currency (N-currency) is convertible into a widely accepted good at a fixed price, the currencies of all other countries are related to it in a fixed relationship no automatism! countries must accept and implement economic policy measures for balance-of-payments adjustments Page 12 Countries with a surplus are under significantly lower pressure to adjust their balance-of-payments!

countries with a balance-of-payments deficit carry a relatively higher cost burden N-country must accept whatever net balance-of- payments position is dictated by the group of n-1 countries in the system: strong and a fairly closed economy at the same time N-currency must be stable Page 13

International Coordination System economic policy coordination of the world economic forces & exchange rate movement coordination crucial: exchange rate regime choice reasons for balance-of-payments disequilibrium: external shocks weak or no accordance in the economic policy of individual countries Page 14 flexible exchange rate  easier reaction to asymmetric shocks & more possibilities for independent economic policy

Monetary Union countries completely give up their national monetary policy and surrender it to some above-national institution common currency becomes the only legal tender in all monetary union member countries Page 15