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
Is the dollar losing its importance?
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 Zurich
• Sydney Paris
• Tokyo London
• Singapore New York
• Frankfurt
• 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
Currency Code Currency Code
Aus $ AUH Italian Lira ITL
Aus Schilling ATS Japanese Yen JPY
Belgian Franc BEF New Zealand Dollar NZD
Sterling GBP Norway Krone NOK
Can $ CAD Portugese Escudo PTE
Dan KrDKK Saudi Riyal SAR
Deutsche Mark DEM Singapore $ SGD
Dutch Guilder NLG Spanish Peseta ESP
French Franc FRF Swedish Kroner SEK
Hongkong Dollar HKD Swiss Franc CHF
Irish Punt IEP US Dollar USD

Note: Reuters uses ISO Codes

 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,
flexible rates are preferable.
 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 : 35.7%
Managed floating : 29.7%
Independently floating : 25.3%
Others : 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
Thank You