The Gold Standard
- “Rules of the Game”: Each country set the rate at which its currency unit could be converted to a weight of gold
- Currency exchange rates were in effect “fixed”
- Expansionary monetary policy was limited to a government’s supply of gold
established a U.S. dollar-based international monetary system and created two new institutions the International Monetary Fund (I M F) and the World Bank
The Bretton Agreement
was created to help countries defend their currencies and assist countries having structural trade problems
The International Monetary Fund
helped fund post-war reconstruction and has since then supported general economic development
The International Bank for Reconstruction and Development
Fixed Exchange Rates
- The U.S. dollar became the main reserve currency held by central banks, resulting in a heavy capital outflow of dollars
- The heavy overhang of dollars held by foreigners resulted in a lack of confidence in the ability of the U.S. to met its commitment to convert dollars to gold
- The lack of confidence forced President Richard Nixon to suspend official purchases or sales of gold by the U.S. Treasury on August 15, 1971
- This resulted in subsequent devaluations of the dollar
- Most currencies were allowed to float to levels determined by market forces as of March 1973
The Floating Era
Since March 1973, exchange rates have become much more volatile and less predictable
There have been numerous, significant world currency events over the past 30 years
The Emerging Era
- Emerging market economics are multiplying in number and growing in complexity
- This results in a growing number of emerging market currencies
Countries that have given up their own sovereignty over monetary policy
E.g., dollarization or currency boards
Category 1: Hard Pegs
A K A fixed exchange rates, with five subcategories of classification
Category 2: Soft Pegs
To increase supply, you need to buy or sell?
Sell
The remains of currency arrangements
Category 4: Residual
To make the value of $ appreciate relative to foreign currency. What does the central bank do?
- Decrease the supply
- Buy the dollar and sell the foreign currency
- The central bank buys cash reserve and sells the treasuries
Can the fixed rate and monetary policy work together?
No
What are the 3 attributes of the Impossibility Triangle?
- Exchange rate stability
- Full financial integration
- Monetary independence
Cheaper transaction costs in the _______
eurozone
The primary driver of a currency’s value is its ability to maintain its _________ _____
purchasing power
The single larges threat to maintaining purchasing power is ________, so the job of the EU has been to prevent __________ _____ from undermining the euro
Inflation; Inflationary forces
exists when a country’s central bank commits to bank its monetary base– its money supply - entirely with foreign reserves at all times
Currency board
the use of the U.S dollar as the official currency of the country
Dollarization
