International Monetary Arrangements

• Goldstandard


  A former monetary system in which participating countries fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely convertible into gold at the fixed price at the central bank.
• Bretton Woods International Monetary System (BWS)


  The international monetary system, a gold exchange standard, in operation in the post-war period until the end of the gold exchange standard in 1971. The system was characterized by a system of adjustable pegs to the US dollar, which in turn, was pegged to gold at $35 an ounce.
• Anchor Currency


  Under a fixed exchange rate system countries tie the value of their currencies to the anchor currency or a basket of anchor currencies. The currency selected is generally a widely traded, acceptable, and stable currency (such as the US-Dollar or the Euro).
• Reserve Currency / International Reserve Currency

  A reserve currency is a foreign currency held by a central bank as part of a country's reserves. The US-Dollar is the most common global reserve currency, but the Euro is increasingly widely used.
• Gold-Exchange Standard


  A fixed exchange rate system in which the participating countries pegged their currencies to the US dollar, which was pegged to gold at a fixed ratio. The US dollar was fully convertible into gold.
• Fixed Exchange Rate System

  In a fixed exchange rate system, the exchange rate is not determined by supply and demand on the foreign exchange market, but the country pegs the currency to another currency (called the anchor currency) or a basket of currencies.
• Exchange Rate Risk


  Exchange rates (in a system of flexible exchange rates) are determined by supply and demand on the foreign exchange market. Changes in supply and demand result in exchange rate changes, exchange rate fluctuations (appreciation, depreciation).
• Gold-Adjustment-Mechanism


  If Britain buys more goods and services from the U.S. than the U.S. buys from Britain, there is an excess supply of pounds on the foreign exchange market. This causes gold to move from the deficit country (Britain) to the surplus country (U.S.), which automatically adjusts the money supply and price levels in both countries to eliminate the trade imbalance.
• Parity


  In a fixed exchange rate system, parity refers to the central rate of exchange.
• Gold-backing of the USD


  Under the Goldstandard, a certain percentage of the money circulating in the economy has to be backed with gold (at the central bank) to guarantee convertibility of domestic currency into gold at the parity.
• Convertibility


  The ability to freely use a currency for international transactions by the residents of any country.
• Foreign Exchange Market Intervention by Central Bank

  In a system of fixed exchange rates, central banks have to buy and sell foreign currency in the foreign exchange market to defend the fixed exchange rate (aka the parity).
• Convertibility


  The ability to freely use a currency for international transactions by the residents of any country
• Foreign Exchange Market Intervention by Central Bank

  1. Central bank buys and sells foreign currency to defend the fixed exchange rate

  2. Central bank must hold anchor currency in its reserves

  3. Anchor currency only created by central bank of anchor currency country

  4. Risk of liquidity problem if domestic currency under devaluation pressure

  5. Central bank must sell anchor currency and buy domestic currency

  6. Reduces domestic money supply and anchor currency reserves

  7. Possible to run out of reserves and have to switch to flexible exchange rate
• Foreign Reserves / International Reserves

  Currency reserves held by central banks in gold and foreign currencies to intervene in foreign exchange market
• Keynes-Plan / Bancor-Plan / UK-Plan


  • Establish world central bank to create new world currency (bancor) that countries peg to
  • International Clearing Union settles trade imbalances
• White-Plan / US-Plan


  • US dollar becomes world reserve currency that countries peg to
  • Fixed but adjustable pegs
  • Central banks intervene to defend parities
  • US dollar pegged to gold and convertible
  • International fund monitors foreign exchange market and helps with payment problems
• International Clearing Union (ICU)

  • Issues its own currency (Bancor) based on 30 commodities
  • Countries have Bancor accounts and overdraft allowances
  • Deficit countries pay interest, adjust, and devalue
  • Surplus countries appreciate exchange rates
  • Aims to bring smooth symmetry of adjustments
• International Monetary Fund (IMF)

  • Promotes monetary cooperation, balanced trade growth, exchange rate stability
  • Monitors global economy, lends to members, provides technical assistance
• Exorbitant Privilege


  Greater macroeconomic space and seigniorage for country issuing major reserve currency
• European Currency Unit (ECU)


  Artificial currency that European countries pegged their currencies to in the EMS
• European Monetary Union / Single Currency (Euro)


  • EMS was fixed exchange rate system within Europe to promote monetary stability
  • ECU was currency basket that EMS currencies were pegged to
• Appreciation


  Currency strengthens in price against another currency
• Depreciation


  Currency loses value against another currency
• Currency War / Competitive Devaluation

  Countries attempt to weaken their currency to gain market share or stimulate exports
• Beggar-Thy-Neighbor-Policy


  Policy that seeks benefits for one country at the expense of others, e.g. imposing tariffs, subsidizing exports, depreciating currency
• Autonomous Monetary Policy


  Central bank can change money supply and interest rates based on inflation and economic conditions
• International Capital Flows


  Cross-border movement of money for investment, trade, or business operations