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
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
Currency Codes
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 Kr DKK Saudi Riyal SAR
Deutsche Mark DEM Singapore $ SGD
Dutch Guilder NLG Spanish Peseta
ESP
French Franc FRF Swedish Kroner SEK
 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,
 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