Download 1. Basic Elements of the International Monetary System

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CONTENTS AND PURPOSE
1. Basic Elements of the International Monetary System
2. Mechanisms for Establishing a Consistent International Monetary
System
• purpose:
• podati konceptualne osnove, ki so potrebne za proučevanje mednarodnega
denarnega sistema
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1. Basic Elements of the
International
Monetary
System
• International monetary system = system of rules,
mechanism and institutions that connects the
national monetary systems into a consistent whole
• Role of the international monetary system:
• ensure exchange rate stability
• facilitate balance-of-payments disequilibria correction
• ensure access to international liquidity
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1. Basic Elements of the International
Monetary System
• solutions for the acceleration of the size of the
international goods and capital flows?
• distribution of the benefits from these flows?
balance-of-payments adjustments
international liquidity facilitation
consistency of the system and confidence
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Balance-of-Payments Adjustments
balance-of-payments disequilibria
elimination process
• long-run equilibrium in the current account!
• neoclassical view and realistic circumstances in the
world economy:
• validity of the automatic elimination of the balance-ofpayments disequlibria assumption?
• analysis of the balance-of-payments disequilibrium
emergence?
• difference in different groups of economic agents?
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International Liquidity Facilitation
• definition of international liquidity
• two segments:
• international liquidity under the ownership of the central bank
foreign
exchange
reserves of
the CB
gold
unused gold
tranche at the
IMF
Special
Drawing
Rights
(SDR)
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International Liquidity Facilitation
• international liquidity under the ownership of all other agents in the
economy:
•
•
•
•
•
operative foreign exchange reserves of commercial banks
foreign exchange assets of non-banking subjects abroad
short-term foreign assets of the residents
long-term, prenosljive foreign bonds of the residents
possibilities of the banks to get credits for financing balance-of-payments
deficit abroad
 sources of financial assets to increase IMR:
 privatni sources of capital
 public sources of capital
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Consistency of the System and Confidence
• relevance of the mechanism for the elimination of
balance-of-payments disequilibria
• appropriateness of the size of the international
liquidity
 n-1 countries can decide independently on their balanceof-payments balance:
establishment of a
n-th country accepts the
balance that is
determined by all the
other countries in the
system
mechanism for the
coordination of the
balance-of-payments
goals
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2. Mechanisms for Establishing a
Consistent International Monetary
System
automatic
adjustment
mechanism
international
coordination
system
n-1 system
monetary union
system
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Automatic Adjustment Mechanism
• changing the level of foreign exchange supply and demand:
• flexible exchange rate:
deficit
domestic currency depreciation
 D for & S of foreign exchange
balance-of-payments equilibrium
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Automatic Adjustment Mechanism
• fixed exchange rate:
• through price changes
• through changes in aggregate expenditures
Marginal propensity
to import
Decreased imports
Multiplier
Fall in
aggregate
expenditures
Balance-ofpayments deficit
Fall in supply
of money
Decrease in GDP
Decrease in
domestic demand
Increased exports
Lower rate
of inflation
Improved
competitiveness relative
to other countries
Decreased imports
Price elasticities
Increased exports
Decrease in
the deficit
n-1 System
• n-th country currency (N-currency) is convertible into a
widely accepted good at a fixed price, the currencies
of all other countries are related to it in a fixed
relationship
• no automatism!
• countries must accept and implement economic policy
measures for balance-of-payments adjustments
Countries with a surplus are under
significantly lower pressure to adjust
their balance-of-payments!
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• countries with a balance-of-payments deficit carry a
relatively higher cost burden
• N-country must accept whatever net balance-ofpayments position is dictated by the group of n-1
countries in the system:
• strong and a fairly closed economy at the same time
• N-currency must be stable
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International Coordination System
• economic policy coordination of the world economic
forces & exchange rate movement coordination
• crucial: exchange rate regime choice
• reasons for balance-of-payments disequilibrium:
• external shocks
• weak or no accordance in the economic policy of individual
countries
flexible exchange rate  easier reaction to asymmetric shocks
& more possibilities for independent economic policy
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Monetary Union
• countries completely give up their national monetary policy and
surrender it to some above-national institution
• common currency becomes the only legal tender in all monetary
union member countries
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