Understanding International Monetary Systems: Key Concepts
International Monetary Systems: Key Concepts
SMI (System of Monetary Institutions): A set of institutional arrangements focusing on:
- Setting exchange rates.
- Facilitating international trade.
- Facilitating capital movements.
- Allowing balance of payments adjustments when imbalances occur.
Flexible or Floating Exchange Rates
The value of the currency is determined by supply and demand, and the central bank does not intervene. This includes free floats and controlled floats within adjustable bands (floats with unofficial central bank interventions).
Fixed Exchange Rates
The central bank sets the currency’s value and acts to maintain it. The currency’s value is linked to a named principal, a basket of currencies, or gold. Types include fixed exchange rate fluctuation bands and adjustable pegs.
The Gold Standard
Full convertibility of currencies into gold. Money was a receipt entitling the holder to withdraw the amount of gold reflected on each ticket. The unit of account was gold. The exchange rate between two currencies was linked to their gold content.
Bretton Woods System Goals
- Encourage global economic growth.
- Promote trade between nations.
- Achieve economic stability both within countries and internationally.
The International Monetary Fund (IMF)
- Ensures compliance with agreed standards regarding trade and international finance.
- Establishes credit facilities for countries with temporary balance of payments difficulties.
- Supervises the economic policies of member countries.
- Promotes responsible fiscal and monetary policies.
- Promotes the development of the private sector and free markets.
- Identifies weaknesses in national economies and requires corrective action.
- Coordinates international efforts to improve the international monetary system.
The World Bank Group
- IBRD (International Bank for Reconstruction and Development): Provides loans and development assistance to middle-income countries.
- IDA (International Development Association): Helps provide better access to basic services (education, health, etc.) to the poorest countries.
- IFC (International Finance Corporation): Promotes economic development through the private sector.
- ICSID (International Centre for Settlement of Investment Disputes): Helps promote a climate of trust between countries and foreign investors.
- MIGA (Multilateral Investment Guarantee Agency): Helps encourage foreign investment in developing countries.
Special Drawing Rights (SDR)
The SDR aims to solve issues related to:
- A lack of liquidity.
- Control.
- Feasibility.
European Monetary System (EMS) Features
Each currency of the EEC member countries had a central rate with reference to the U.S. dollar and could not deviate from the fluctuation band of ± 2.25%. The value of each currency of the EEC member countries could not vary more than 2.25% with respect to another member country’s currency.
European Monetary Cooperation Fund (EMCF)
A monetary system that bases its operation on exchange rate stability criteria requires a fund to provide liquidity to countries whose currencies are attached to this commitment to stability, when cyclical factors are unable to maintain the value of its currency within allowed fluctuation margins.
Exchange Rate Mechanism II (ERM-II)
ERM-II is an agreement of exchange rates between the euro and the EU currencies not participating in the euro, with the objective of ensuring exchange rate stability in the market.