BUS 200 Lecture Notes - Lecture 17: Floating Exchange Rate, Foreign Exchange Market, Bretton Woods System
Chapter 11 –
The changing international monetary system, and the role of the International Monetary System (IMF)
and the World Bank
The international monetary system refers to the institutional arrangements that govern exchange rates
1. Floating exchange rate system
2. Dirty float
3. Fixed exchange rate system
4. Pegged exchange rate system
• In a floating exchange rate system the foreign exchange market determines the relative value of
a currency
➢ In a dirty float the value of a currency is determined by market forces, but with central
bank intervention if it depreciates too rapidly against an important reference currency
• In a fixed exchange rate system currencies are fixed against each other at a mutually agreed
upon value
• In a pegged exchange rate system the value of a currency is fixed to a reference country and
then the exchange rate between that currency and other currencies is determined by the
reference currency exchange rate
The Gold Standard
• The gold standard refers to the practice of pegging currencies to gold and guaranteeing
convertibility
• Dates back to ancient times when gold coins were a medium of exchange, unit of
account, and store of value
• The exchange rate between currencies was based on the gold par value - the amount of
a currency needed to purchase one ounce of gold
• The key strength of the gold standard was its powerful mechanism for simultaneously achieving
balance-of-trade equilibrium by all countries
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Document Summary
The changing international monetary system, and the role of the international monetary system (imf) and the world bank. The international monetary system refers to the institutional arrangements that govern exchange rates: floating exchange rate system, dirty float, fixed exchange rate system, pegged exchange rate system. In a floating exchange rate system the foreign exchange market determines the relative value of a currency. In a dirty float the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency. In a fixed exchange rate system currencies are fixed against each other at a mutually agreed upon value. In a pegged exchange rate system the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
