BUS 200 Lecture Notes - Lecture 18: Floating Exchange Rate, European Monetary System, Currency Crisis
Chapter 11 – cont
The Collapse of the Fixed System
• The Bretton Woods system relied on an economically well managed U.S.
• So, when the U.S. began to print money, run high trade deficits, and experience high inflation,
the system was strained to the breaking point
• The Bretton Woods Agreement collapsed in 1973
Floating Exchange Rate Regime
• Following the collapse of the Bretton Woods agreement, a floating exchange rate regime was
formalized in 1976 in Jamaica
• The rules for the international monetary system that were agreed upon at the meeting are still
in place today
• At the Jamaica meeting, the IMF's Articles of Agreement were revised to reflect the new reality
of floating exchange rates
• Under the Jamaican agreement:
o Floating rates were declared acceptable
o Gold was abandoned as a reserve asset
o Total annual IMF quotas - the amount member countries contribute to the IMF - were
increased to $41 billion (today, this number is $383 billion)
• Since 1973, exchange rates have become more volatile and less predictable because of:
o The oil crisis in 1971
o The loss of confidence in the dollar after U.S. inflation jumped between 1977 and 1978
o The oil crisis of 1979
o The rise in the dollar between 1980 and 1985
o The partial collapse of the European Monetary System in 1992
o The 1997 Asian currency crisis
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Document Summary
Following the collapse of the bretton woods agreement, a floating exchange rate regime was formalized in 1976 in jamaica. Floating exchange rates: disappointment with floating rates in recent years has led to renewed debate about the merits of a fixed exchange rate system, a floating exchange rate system provides two attractive features: Automatic trade balance adjustments: a fixed exchange rate system is attractive because: The imf has redefined its mission, and now focuses on lending money to countries experiencing financial crises in exchange for enacting certain macroeconomic policies. Three types of financial crises requiring imf involvement: a currency crisis, a banking crisis, a foreign debt crisis. In 2012, 52 countries were working imf programs: all imf loan packages come with conditions - generally a combination of tight macroeconomic and monetary policies. Inappropriate policies: moral hazard, lack of accountability, as with many debates about international economics, it is not clear who is right.
