International Money And Finance 3

Front 1

international monetary system

Back 1

1. institutional arrangements that countries adopt to govern exchange rates
2. regarding exchange rate to other currencies

Front 2

When foreign exchange market determines the relative value of a currency, a _____ exists.

Back 2

floating system

Front 3

Countries adopt a _____when they fix their currencies against each other

Back 3

fixed exchange rate system

Front 4

Why all had gold standard?

Back 4

1. system helped to control inflation- capped
2. in relation to external balances, gold can balance trade deficit

Front 5

How does Gold reserve get rid of deficit?

Back 5

exports ^, imports v, price v, GR v
spending <earning
imp< exp

Front 6

Gold Standard years

Back 6

1880-1914

Front 7

Gold Standard- why gold?

Back 7

1. with development of technology, easier to mine silver
2. supply of gold is stable

Front 8

Gold Standard characteristics

Back 8

1. Country's money supply was fixed by the amount of gold it held.
2. currencies were linked based on the amount of gold they could exchange
3. guaranteed convertibility of currency to gold by gov
4. avoid inflation

Front 9

Years of fall of gold standard

Back 9

1918-1939

Front 10

when did countries abandon gold standard and why?

Back 10

1. start of WWI
2. costs of war led countries to print money resulting in inflation
3. wars cost govs money, don't guarantee link to gold
4. people have no faith in currencies

Front 11

What happens after 1939?

Back 11

1. bretton woods agreement ('44)
2. fixed exchange rates deemed desirable
3. agree to peg currencies to USD within 1% parity and USD is convertible to gol
4. Promise not to devalue currency for trade purposes and will defend currencies (to gain that competitive edge)

Front 12

What institutions were created at Bretton woods?

Back 12

World bank
international monetary fund

Front 13

Discipline aspect of IMF

Back 13

1. fixed rate imposes discipline:
2. need to maintain rate- stops competitive devaluations
3. imposes monetary discipline/curtails inflation

Front 14

Two aspects of IMF

Back 14

Discipline and flexibility

Front 15

Flexible aspect of IMF

Back 15

1. Lending facility
-Lend foreign currencies to countries having balance of payments problems
-quota system, SDR, and votes
2. Lending conditionality
- reducing gov spending, raising taxes, and restricting money growth

Front 16

World Bank:
Original name, function

Back 16

1. International Bank for Reconstruction and Development
2. Rebuild Europe's war torn economies
3. development
4. lending money to Third world countries for agriculture, education, population control, and urban development

Front 17

When did Fixed Exchange Rate system collapse?

Back 17

1973

Front 18

Why did Fixed Exchange Rate system collapse?

Back 18

1. US' Gold reserves down
2. US budget deficit up
3. pressure to devalue dollar
-high inflation, high spending on imports

Front 19

What happened after fixed exchange rate system collapse?

Back 19

1. Nixon took dollar off gold standard and kept 10% import tax
2. countries agreed to revalue their currencies against the dollar

Front 20

WHat is the world's exchange system today?

Back 20

hybrid exchange rate system: floating exchange rate regime

Front 21

When did the Jamaica Agreement happen? What happened there?

Back 21

1976
floating rates acceptable
market force to determine exchange rates

Front 22

floating exchange rate system is associated with

Back 22

more volatility and uncertainty

Front 23

What does IMF do today?

Back 23

helps countries cope with macro and exchange rate problems
still lender of last resort

Front 24

optimum currency area characteristics

Back 24

geographical close
similar economies
costless mobility of production factors
ex: euro zone

Front 25

optimum currency area

Back 25

the best area within which exchange rates are fixed among currencies in the area and between which exchange rates are flexible among areas

Front 26

Treaty of Maastricht

Back 26

1. 12 of 15 memeber states in 2002
2. jan 1999- exchange rates locked in
3. jan 2002- euro notes and coins issued
4. national currencies taken out of circulation

Front 27

Benefits of the Euro

Back 27

1. savings from using only one currency
2. easy to compare prices, resulting in lower prices
3. forces companies to be more efficient and cut costs
4. creates liquid pan europe capital market
5. increases range of investments for individuals and institutions
6. no transaction costs/risks

Front 28

Costs of Euro

Back 28

1. Countries lose monetary and fiscal policy control
2. EU is not an optimal currency area

Front 29

How do countries lose monetary and fiscal policy control?

Back 29

1. European Central Bank controls interest rate for the euro zone
2. all member countries have to keep their country's gross debt and government budget deficit within specified limit by EU

Front 30

Benefits of fixed exchange rate

Back 30

1. good for trade
2. no fluctuation or hedging
3. minimize inflation concern

Front 31

Characteristics associated with countries choosing to peg

Back 31

1. small size
2. open economy
3. harmonious inflation rate
4. concentrated trade

Front 32

Characteristics associated with countries choosing to float

Back 32

1. large size
2. closed economy
3. divergent inflation rate
4. diversified trade

Front 33

Currency crisis

Back 33

substantial nominal currency devaluation by at least 25%

Front 34

Currency crisis always triggers

Back 34

substantial decrease of equity prices, stock prices, and capital flight

Front 35

Increase or decrease of frequency of currency crisis in recent years?

Back 35

increase:
42 crises in developed countries
116 in emerging markets
between 1975-1997

Front 36

Causes of currency crises

Back 36

1. global factors: a more integrated financial markets leads to large volume of capital flows in and out of small markets
2. unsustainable macro policies: over spending by public and private sectors, trade deficit, etc
3. exchange rate misalignment: overvalue of currency under fixed exchange rate system
4. poor financial infrastructure: bad loans
5. political instability
6. speculation

Front 37

main players in exchange rate market

Back 37

government
hedge funds

Front 38

factors for country risk analysis

Back 38

1. external debt
2. international reserve holdings
3. exports
4. economic growth