International Economics

Lecturer: Tong Thi Minh Phuong

THE INTERNATIONAL MONETARY

SYSTEMS
 Learning Goals:
 Describe how the postwar Bretton Woods system
operated and why it collapsed
 Know how the present international monetary
system works
 Identify the major international economic problems
facing the world today

International Economics © 2023-24 Tong Thi Minh Phuong

 LECTURE 9: THE INTERNATIONAL
MONETARY SYSTEMS

9.1 Overview of international monetary

system
9.2 Alternative international monetary
systems in the past

International Economics © 2023-24 Tong Thi Minh Phuong

 9.1 Overview of international monetary
system
 Definition of international monetary system
 Classification of international monetary system
 Characteristics of an efficient international
monetary system

International Economics © 2023-24 Tong Thi Minh Phuong

 Introduction

 An international monetary system refers to

the rules, customs, instruments, facilities and
organizations for effecting international
payments.
 A good international monetary system is one
that:maximizes the flow of international trade
and investments.
 Leads to “equitable” distribution of gains
from trade among nations.

International Economics © 2023-24 Tong Thi Minh Phuong

 An international monetary system can
be evaluated in terms of:
 Adjustment – process by which balance of
payments disequilibria are corrected.
 Liquidity – amount of international reserve
assets available to settle temporary balance of
payments disequilibria.
 Confidence – knowledge that the adjustment
mechanism is working adequately, and that
international reserves will retain their
absolute and relative values.

International Economics © 2023-24 Tong Thi Minh Phuong

 9.2 Alternative international monetary
systems in the past
 9.2.1. The gold standard system
 9.2.2. The interwar/Genoa monetary system
 9.2.3. The Bretton Woods system
 9.2.4. The present international monetary system

International Economics © 2023-24 Tong Thi Minh Phuong

 The Gold Standard and the Interwar
Experience
 The Gold Standard Period ( )Nations defined
the gold content of its currency and passively
stood ready to buy or sell any amount of gold
at that price.
 Exchange rates were fixed at mint parity,
allowed to fluctuate by cost of shipping.
 Adjustment mechanism was Hume’s price-
specie flow mechanism (see chapter
16).Nations could not use monetary policy for
achieving full employment without inflation.
International Economics © 2023-24 Tong Thi Minh Phuong
 The Gold Standard and the Interwar
Experience
 The Gold Standard Period
In reality, adjustment process worked much too smoothly and
quickly, with few actual transfers of gold.
Adjustments occurred because of special conditions that
existed during this time:
 Great economic expansion and stability in most of the
world.
 Pound sterling was only important international currency.
 Greater price flexibility than today.

International Economics © 2023-24 Tong Thi Minh Phuong

 The Gold Standard and the Interwar
Experience
 Classical gold standard ended with outbreak
of World War I.
 Wildly fluctuating exchange rates from 1919
to led nations to return to a modified gold
standard.
 The gold-exchange standard allowed gold
and currencies convertible into gold to be
used as international reserves.

International Economics © 2023-24 Tong Thi Minh Phuong

 The Gold Standard and the Interwar
Experience
 Causes of gold-exchange standard collapse:
 Lack of adequate adjustment mechanisms
 Huge destabilizing capital flows from
London to New York and Paris.
 Outbreak of the Great Depression.
 From 1931 to 1936, great instability and
competitive devaluations, increased
protectionism, international trade cut almost
in half.

International Economics © 2023-24 Tong Thi Minh Phuong

 The Bretton Woods System
 Gold-Exchange Standard ( )
 Bretton Woods was a gold-exchange
standard, with the United States maintaining
the price of gold at $35 per ounce, standing
ready to exchange dollars for gold.
 Other nations fixed their exchange rates in
terms of dollars, maintaining rates within one
percent above or below par value.

International Economics © 2023-24 Tong Thi Minh Phuong

 System devised at Bretton Woods called for
establishment of International Monetary Fund
(IMF) for purposes of:
 Overseeing that nations followed rules of
conduct in international trade and finance.
 Providing borrowing facilities for nations in
temporary balance of payments difficulties.

International Economics © 2023-24 Tong Thi Minh Phuong

  Operation and Evolution of the Bretton
Woods System
 U.S. Balance-of-Payments Deficit and
Collapse of the Bretton Woods System

International Economics © 2023-24 Tong Thi Minh Phuong

  Operation of the Present System
 Current IMF Operation

International Economics © 2023-24 Tong Thi Minh Phuong

 The International Monetary System:
Present and Future
 Following the collapse of the Bretton Woods
System, the monetary system moved to a
system of managed floats.
 Officially acknowledged by the Jamaica
Accords of 1976.
 International reserves for currency
intervention still provided by the IMF.
 The lending ability of the IMF was expanded
in 1997 by the New Arrangement to Borrow.

International Economics © 2023-24 Tong Thi Minh Phuong

 The International Monetary
System: Present and Future
 The use of IMF conditionality has come to be
a source of great contention within the
international monetary system.
 IMF Conditions for Loans and Special Help:
 Reductions in government spending
 Growth of the money supply
 Wage increases to reduce imports, stimulate
exports, and make country more self-
sustaining

International Economics © 2023-24 Tong Thi Minh Phuong

 Problems with Present Exchange Rate
Arrangements
(1) Large volatility, and wide and persistent
misalignments of exchange rates
(2) the fail to promote greater coordination
of economic policies among the leading
industrial nations;
(3) the inability to prevent
international financial crises or to deal with
them adequately when they do arise.

International Economics © 2023-24 Tong Thi Minh Phuong

 Current International Problems

 Financial crises in emerging market

economies.
 Trade protectionism in advanced countries in
a rapidly globalizing world.
 Structural imbalances in the United States,
slow growth in Europe and Japan, and
insufficient restructuring in transition
economies.

International Economics © 2023-24 Tong Thi Minh Phuong

 Current International Problems

 Deep poverty in many developing countries

 Resource scarcity, environmental
degradation, climate change and sustainable
development

International Economics © 2023-24 Tong Thi Minh Phuong

 Proposals for Reforming
Present Exchange Rate
Arrangements

International Economics © 2023-24 Tong Thi Minh Phuong Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
 Proposals for reforming
 Several proposals have been advanced to
reduce exchange rate volatility and avoid
large exchange rate misalignments.
 One proposal, first advanced by Williamson
(1986), is based on the establishment of target
zones. Under such a system, the leading
industrial nations estimate the equilibrium
exchange rate and agree on the range of
allowed fluctuation

International Economics © 2023-24 Tong Thi Minh Phuong

 Proposals for reforming
 Miller and Williamson (1988) extended their
blueprint to require substantial policy
coordination on the part of the leading
industrial nations so as to reduce the need for
intervention in foreign exchange markets to
keep exchange rates within the target zones.

International Economics © 2023-24 Tong Thi Minh Phuong

Proposals for reforming
 Extensive policy coordination among the
leading countries. The best and most
articulate of these proposals is the one
advanced by McKinnon (1984, 1988). Under
this system, the United States, Japan, and
Germany (now the European Monetary
Union) would fix the exchange rate among
their currencies at their equilibrium level
(determined by purchasing-power parity)
and then closely coordinate their monetary
policies to keep exchange rates fixed.
 Proposals for reforming
 Another proposal advocated by the IMF Interim Committee in
1986 was based on the development of objective indicators of
economic performance to signal the type of coordinated macro-
policies for nations to follow, under the supervision of the Fund,
in order to keep the world economy growing along a sustainable
noninflationary path.
 The growth of GNP, inflation, unemployment, trade balance,
growth of the money supply, fiscal balance, exchange rates,
interest rates, and international reserves.
 Thank you!
Slides: International Economics © 2023-24 Tong Thi Minh Phuong

Contents from Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.