Pegged E.r regime:
Countries peg currency value to other of major currencies. P.e.r are popular in world’s smaller nations. Evidence that adopting p.e.r.regime moderates a country’s inflationary pressures.
Post-Bretton Woods Era
3 financial crisis 1 Currency crisis (when speculative attack on currency exchange value depreciates it sharply. 2 Banking crisis ( loss of confidence leads banks withdrawal) 3 Foreign debt crisis (Country cannot service its foreign debt obligations. 2 crisis: Mexican & Asian)
Mexican Crisis:
1995. High Mexican debts and pegged exchange rate that did not allow natural adjustment of prices. $50 billion aid package by IMF. 1997 mexico was well.
Asian Crisis
1997. Causes: 1 Investment Boom (large investments based on unrealistic future demand conditions) 2 Excess capacity ( investments created excess capacity) 3 DebtBomb ( when inflation pressured currencies, debts on dollar appeared) 4 Expanding Imports ( by 90s imports expanding causing balance of payments deficit, being hard for countries to maintain currencies against the U.S. dollar). By 1997 foreign exch dealers started speculate against Thai baht, selling it short. After struggling to defend the peg, Thai government abandoned its defense and announced baht float freely against US dollar. Thailand asked IMF for help. Speculation affected Malaysia, Indonesia and Singapore, currencies dropping. Devaluations result of excess investment. South Korea final country to fall.
IMF’S Policy Prescriptions
2006, 59 countries working for IMF. Experts criticise these policy prescriptions for 3 reasons 1 Inappropiate Policies (IMF criticized “one size fits all”) 2 Moral Hazard (Criticized for exacerbating moral hazard cuz will be saved if things go wrong) 3 Lack of Accountability (IMP become too powerful because lacks any real accountability mechanism). Not clear who is right.
IMS Implications for managers
Affects managers 3 ways 1 Currency management (current e.r.system is a managed float. So government influences currency values. Firms can protect themselves from e.r. volatility through forward markets) 2 Business Strategy (e.r. movements major impact on business competitive position. Forward market offer protection from volatile e.r. in short term. Firms protect from uncertainty of e.r.movements by building strategic flexibility into their operations) 3 Corporate-government relations (firms should focus their efforts on encouraging government to promote international trade growth and adopt an international monetary system that minimizes volatile exchange rates).
I.M.S?
Institutional arrangements tha govern exchange rates. Foreign exchange market primary institution for determining e.r.
Floating exchange rate system (when foreign exchange market determines relative value of a currency).
Pegged exchange rate system (value of currency is fixed and exchange rate determined by reference currency exchange rate).
IMFevolution
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Gold Standard
Ancient times. Paper currency. Mechanics (G.S practice of pegging currencies to gold. Gold par value exchange) Strenght (powerful mechanism for achieving balance of trade equilibrium by all countries. Believe g.s. should return). Well from 1870 till 1ww. After, countries devalued currencies. Confidence fell. G.s. ended 1939).
– Bretton Woods System
New i.m.s. in 1944 in b.woods. Goal to build enduring economic order to facilitate postwar economic growth. 2 institutions 1 IMF (maintain system order), 2 World Bank (economic development). US dollar only currency convertible to gold. Devaluations not used. Not devalue more than 10% without i.m.f. approval.-
IMF
Avoiding chaos through 1 Discipline (fixed exchange rate brings stability) 2 Flexibility ( rigid policy, and yes 10% with imf)
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World Bank
Int bank fir Recons and Devel. Lends money in 2 ways 1 Under IBRD scheme (money raised through bond sales, borrowers pay interest) 2 Int Devel Agency scheme (loan only poorest countries).
Collapse of Fixed exch. Rate system:
Traced to U.S. macroeconomic policy decisions (1965 to 1968). U.S. financed welfare programes and Vietnam War by increasing its money supply, which caused inflation. B woods system relied on an economically well managed U.S. So when u.s. began print money and experience high inflation, the system surpassed its limit. Bw collapsed in 1973.
Floating Exchange rate regime
Established in 1976 in Jamaica.
J Agreement (floating e.r. declared acceptable. Gold abandoned. Total annual IMF quotas increased to $41 billion, 311 b today).
Fixed vs Floating exchange rates
Disappointment with floating rates recent years led to merits of fixed e.r system. a).
Floating e.r:
2 attractive features 1 Monetary policy autonomy ( removal of obligation to maintain e.r. parity). 2 Trade Balance Adjustments (balance of payments better under floating er regime. IMF approval needed to correct permanent deficit). (b).
Fixed e.r:
4 features 1 Monetary discipline 2 limited speculation 3 limited uncertainty 4 lack of connction betw trade balance and e.r.