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Alan Shapiro and Peter Moles: International Financial Management 1st Edition John Wiley & Sons, Inc
Alan Shapiro and Peter Moles: International Financial Management 1st Edition John Wiley & Sons, Inc
Alan Shapiro and Peter Moles: International Financial Management 1st Edition John Wiley & Sons, Inc
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CHAPTER 3
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
I. FIVE MARKET MECHANISMS
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
C. Target-zone arrangement
1. Rate determination
a. Market forces constrained to upper
and lower range of rates.
b. Members to the arrangement adjust their
national economic policies to maintain target.
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
1. Rate determination
a. Government maintains target rates.
b. If rates threatened, central banks buy/sell
currency.
c. Monetary policies coordinated.
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
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ALTERNATIVE EXCHANGE RATE
SYSTEMS
E. Current system
1. A hybrid system
a. Major currencies: use freely-floating
method.
b. Others move in and out of various fixed-
rate systems.
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
I. THE USE OF GOLD
A. Desirable properties.
B. In short run: High production costs limit short-
run changes.
C. In long run: Commodity money insures
stability.
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
II. THE CLASSICAL GOLD STANDARD
(1821–1914)
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
III. THE GOLD EXCHANGE STANDARD (1925‒1931)
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
IV. THE BRETTON WOODS SYSTEM (1946‒
1971)
A. The Bretton Woods Agreement
1. US$ was key currency;
valued at US$1 = 1/35 oz. of gold.
2. All currencies linked to that price in a fixed
rate system.
3. Exchange rates allowed to fluctuate by 1%
above or below initially set rates.
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
B. Collapse, 1971
1. Causes:
a. U.S. high inflation rate.
b. US$ depreciated sharply.
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
V. POST-BRETTON WOODS SYSTEM
(1971–PRESENT)
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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A BRIEF HISTORY OF THE
INTERNATIONAL MONETARY SYSTEM
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THE EUROPEAN MONETARY
SYSTEM
B. EMS objective
to provide exchange rate stability to all
members by holding exchange rates within specified
limits.
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THE EUROPEAN MONETARY
SYSTEM
C. European Currency Unit (ECU)
a “cocktail” of European currencies with
specified weights as the unit of account.
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THE EUROPEAN MONETARY
SYSTEM
2. Member pledge:
to keep within 15% margin above or below
the central rate.
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THE EUROPEAN MONETARY
SYSTEM
2. Currency Crisis of Sept. 1992
a. System breaks down.
b. Britain and Italy forced to
withdraw from EMS.
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THE EUROPEAN MONETARY
SYSTEM
F. Maastricht Treaty
1. Calls for monetary union by 1999
(moved to 2002).
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THE EUROPEAN MONETARY
SYSTEM
I. COSTS/BENEFITS OF A SINGLE CURRENCY
A. Benefits
1. Reduces cost of doing business.
2. Reduces exchange rate risk.
B. Costs
1. Lack of national monetary flexibility.
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EUROZONE CRISIS
Post-credit crunch, Greece was the first, to be followed by
Ireland, Portugal, and Spain, created the “Eurozone crisis”.
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EMERGING MARKET CURRENCY
CRISES
Tendency for EM countries to experience large and sudden
currency crises:
Mexico 1994–95
Asian crisis 1997
Russia and Brazil 1998–99
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EMERGING MARKET CURRENCY
CRISES
Transmission mechanisms:
Trade links
Weak financial systems
EM countries’ debt policies
Origins:
Moral hazard
Fundamental policy conflicts
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