Multinational Financial

Management
Hanna Deseasari 1110534003
Yuri Annisa 1110534006
Doni Rahmad 1110534009
Vilgia Delarhoza1110534016
Olfa Resha 1110534017
Fachriza Mizafin 1110534021
Risma

Determination of Rate and

International Monetary System
I.
II.
III.
IV.

ALTERNATIVE EXCHANGE RATE SYSTEMS

A BRIEF HISTORY OF THE INTERNATIONAL
MONETARY SYTEM
THE EUROPEAN MONETARY
SYSTEM AND
MONETARY UNION
EMERGING MARKET CURRENCY CRISES

I. ALTERNATIVE EXCHANGE RATE

SYSTEMS
I.

FIVE MARKET MECHANISMS

a. Freely Floating (Clean Float)
1. Market forces of supply and demand determine rates.
2. Forces influenced by
a. price levels
b. interest rates
c. economic growth
3. Rates fluctuate randomly over time.
b. Managed Float (Dirty Float)
1. Market forces set rates unless excess volatility occurs.
2. Then, central bank determines rate.
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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.

ALTERNATIVE EXCHANGE
RATE SYSTEMS
D.

Fixed Rate System

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
E. Current System
1. A hybrid system
a. Major currencies: use freelyfloating method
b. Other currencies move in and
out of various fixed-rate
systems.

PART II. A BRIEF HISTORY OF

THE INTERNATIONAL MONETARY
SYSTEM
I. THE USE OF GOLD
A. Desirable properties
B. In short run: High production costs
limit
changes.
C. In long run: Commodity money
insures
stability.

A BRIEF HISTORY
II.

The Classical Gold Standard

(1821-1914)

A. Major global currencies on gold

standard.
1. Nations fix the exchange rate
in terms of a specific amount
of
gold.

A BRIEF HISTORY
2. Maintenance involved the
buying and selling of gold at that
price.
3. Disturbances in Price Levels:
Would be offset by the pricespecie*-flow mechanism.
* specie = gold coins

A BRIEF HISTORY
a. Price-specie-flow mechanism
adjustments were automatic:
1.) When a balance of payments
surplus led to a gold inflow;
2.) Gold inflow
led to higher
prices which
reduced surplus;
3.) Gold outflow led to lower
prices and increased surplus.

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A BRIEF HISTORY
III. The Gold Exchange Standard
(1925-1931)
A. Only U.S. and Britain allowed
to hold gold reserves.
B. Others could hold both gold, dollars
or pound reserves.

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A BRIEF HISTORY
C. Currencies devalued in 1931
- led to trade wars.
D.Bretton Woods
Conference
- called in order to avoid
future protectionist and
destructive economic policies

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A BRIEF HISTORY
V.The Bretton Woods System (1946-1971)
1. U.S.$ was key currency;
valued at $1 - 1/35 oz. of
gold.
2. All currencies linked to
in
a fixed rate system.

that price

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A BRIEF HISTORY
3. Exchange rates allowed to fluctuate
by 1% above or below initially set
rates.
B. Collapse, 1971
1. Causes:
a. U.S. high inflation rate
b. U.S.$ depreciated sharply.

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A BRIEF HISTORY
V.Post-Bretton Woods System (1971Present)
A. Smithsonian Agreement, 1971:
US$ devalued to 1/38 oz. of
gold.
By 1973: World on a freely floating
exchange rate system.

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A BRIEF HISTORY
B. OPEC and the Oil Crisis (1973-774)
1. OPEC raised oil prices four fold;
2.

Exchange rate turmoil resulted;

3.
Caused OPEC nations to earn
large surplus B-O-P.

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A BRIEF HISTORY
4. Surpluses recycled to debtor
nations which set up debt
crisis
of 1980s.
C. Dollar Crisis (1977-78)
1. U.S. B-O-P difficulties
2. Result of inconsistent
monetary policy in U.S.

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A BRIEF HISTORY
3. Dollar value falls as confidence
shrinks.
D.

The Rising Dollar (1980-85)

1. U.S. inflation subsides as the Fed
raises interest rates
2. Rising rates attracts global capital to
U.S.

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A BRIEF HISTORY
3. Result: Dollar value
rises.
E. The Sinking Dollar:(1985-87)
1. Dollar revaluated slowly
downward;
2. Plaza Agreement (1985)
G-5 agree to depress US$
further.

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A BRIEF HISTORY
3. Louvre Agreement (1987)
G-7 agree to support the
falling US$.
F. Recent History (1988-Present)
1. 1988 US$ stabilized
2. Post-1991 Confidence
resulted in stronger
dollar
3. 1993-1995 Dollar value

falls

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PART III.
THE EUROPEAN MONETARY
SYSTEM
I. INTRODUCTION
A. The European Monetary System
(EMS)
1. A target-zone method
(1979)
2. Close macroeconomic
policy coordination required.

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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.

22

THE EUROPEAN MONETARY

SYSTEM
C. European Currency Unit (ECU)
a cocktail of European
currencies with specified weights as
the unit of account.

23

THE EUROPEAN MONETARY

SYSTEM
1. Exchange rate mechanism
(ERM)
- each member determines
mutually
rate for

agreed upon central cross

its currency.

24

THE EUROPEAN MONETARY

SYSTEM
2.Member Pledge:
to keep within 15%
margin above or below
central rate.

the

25

THE EUROPEAN MONETARY

SYSTEM
D. EMS ups and downs
1. Foreign exchange
interventions:
failed due to lack of
support by coordinated
monetary policies.
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THE EUROPEAN MONETARY

SYSTEM
2.Currency Crisis of Sept. 1992
a. System broke down
b.Britain and Italy
forced towithdraw
from
EMS.

27

THE EUROPEAN MONETARY

SYSTEM
G. Failure of the EMS:
members allowed political
priorities to dominate
exchange rate policies.

28

THE EUROPEAN MONETARY

SYSTEM
H. Maastricht Treaty
1.Called for Monetary
Union by 1999 (moved to
2002)
2.Established a single
currency:
the euro

29

THE EUROPEAN MONETARY

SYSTEM
3. Calls for creation of a single
central EU bank
4. Adopts tough fiscal
standards

30

THE EUROPEAN MONETARY

SYSTEM
I. Costs / Benefits of A Single Currency
A. Benefits
1. Reduces cost of doing
business
2. Reduces exchange rate
risk

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THE EUROPEAN MONETARY

SYSTEM
B. Costs
1.Lack of national
monetary flexibility.

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PART IV. EMERGING MARKET

CURRENCY CRISES
Transmission Mechanisms

I.

A.

Trade links
contagion spreads through trade
B. Financial System
-more important transmission
mechanism
-investors sell off to make up for
losses
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EMERGING MARKET CURRENCY

CRISES
II.

Origins of Emerging Market Crises

A. Moral hazard
B. Fundamental Policy Conflict

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EMERGING MARKET CURRENCY

CRISES
III.

Policy Proposals for Dealing with

Emerging Market Crises
A. Currency Controls
B.

Freely Floating Currency

C. Permanently Fixed Exchange

Rate

35