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MGC2120 (20)
Chapter 11

MGC2120 Chapter Notes - Chapter 11: Floating Exchange Rate, Bretton Woods System, Fixed Exchange-Rate System


Department
Management
Course Code
MGC2120
Professor
Dr Lakmal Abeysekera
Chapter
11

Page:
of 4
International*Business*–*Chapter*11*–*The*International*Monetary*System*
The*system!"!#$%$#&!'(!')$!*+&'*','*(+-.!-##-+/$0$+'&!')-'!/(1$#+!$23)-+/$!#-'$&4!!
Floating*exchange*rate!"!')$!1-.,$!(%!')$!3,##$+35!*&!%*2$6!#$.-'*1$!'(!-!#$%$#$+3$!
3,##$+357!&,3)!-&!')$!849!6(..-#4!!
Dirty*float!"!3(,+'#*$&!'#5!'(!)(.6!')$!1-.,$!(%!')$*#!3,##$+35!:*')*+!&(0$!#-+/$!
-/-*+&'!-+!*0;(#'-+'!#$%$#$+3$!3,##$+354!!
Fixed*exchange*rate!"!')$!1-.,$&!(%!-!&$'!(%!3,##$+3*$&!-#$!%*2$6!-/-*+&'!$-3)!(')$#!
-'!&(0$!0,',-..5!-/#$$6!(+!$23)-+/$!#-'$4!<,#(;$-+!=(+$'-#5!95&'$0!><=9?!*&!
:)$#$!&$1$#-.!0$0@$#!&'-'$&!(%!')$!<8!(;$#-'$6!:*')!%*2$6!$23)-+/$!#-'$&4!!
The$Gold$Standard$
Mechanics$of$the$standard$
A /(.6!&'-+6-#6B!;$//*+/!3,##$+3*$&!'(!/(.6!-+6!/,-#-+'$$*+/!3(+1$#'*@*.*'54!!
A C(.6!@-#!1-.,$!*&!')$!-0(,+'!(%!-!3,##$+35!+$$6$6!'(!;,#3)-&$!(+$!(,+3$!(%!
/(.64!!
Strength$of$the$gold$standard$
A @-.-+3$!(%!'#-6$!$D,*.*@#*,0!"!:)$+!')$!*+3(0$!*'&!#$&*6$+'&!$-#+!%#(0!
$2;(#'&!*&!$D,-.!'(!')$!0(+$5!*'&!#$&*6$+'&!;-5!'(!(')$#!3(,+'#*$&!%(#!*0;(#'4!!
A E'!*&!&*0;.$!-+6!-''#-3'*1$4!!
The$period$between$the$wars:$1918;1939$
A /(.6!&'-+6-#6!:(#F$6!:$..!%#(0!')$!GHIJ&!,+'*.!')$!&'-#'!(%!KKE4!!
A L$'!#$&,.'!:-&!')$!&)-''$#*+/!(%!-+5!#$0-*+*+/!3(+%*6$+3$!*+!')$!&5&'$04!M)*&!
;,'!;#$&&,#$!(+!')$!/(.6!#$&$#1$&!(%!1-#*(,&!3(,+'#*$&7!%(#3*+/!')$0!'(!
&,&;$+6!/(.6!3(+1$#'*@*.*'54!!
The$Bretton$Woods$System$
M)$!-/#$$0$+'!#$-3)$6!':(!0,.'*+-'*(+-.!*+&'*','*(+&!"!')$!E+'$#+-'*(+-.!=(+$'-#5!
N,+6!>E=N?!-+6!')$!K(#.6!O-+F4!!
M)$!E=N!#(.$!*&!'(!.$+6!%(#$*/+!3,##$+3*$&!'(!0$0@$#&!'(!'*6$!')$0!(1$#!6,#*+/!
&)(#'!;$#*(6&!(%!@-.-+3$A(%A;-50$+'&!6$%*3*'&7!:)$+!-!#-;*6!'*/)'$+*+/!(%!0(+$'-#5!
(#!%*&3-.!;(.*35!:(,.6!),#'!6(0$&'*3!$0;.(50$+'4!P(,+'#*$&!:$#$!-..(:$6!'(!@(##(:!
-!.*0*'$6!-0(,+'!%#(0!')$!E=N!:*')(,'!-6)$#*+/!'(!-+5!&;$3*%*3!-/#$$0$+'&4!!
M)$!K(#.6!O-+F!#(.$!*&!'(!#$3(+&'#,3'!')$!:-#A'(#+!$3(+(0*$&!(%!<,#(;$4!M)$!@-+FQ&!
-''$+'*(+!'(!6$1$.(;0$+'!-+6!.$+6*+/!0(+$5!'(!')$!M)*#6!K(#.6!+-'*(+&4!E'!.$+6&!
0(+$5!,+6$#!':(!&3)$0$&4!!
M)$!N*2$6!3)-+/$!#-'$!&5&'$0!')$+!3(..-;&$6!:)$#$!')$!O#$''(+!K((6&!&)(:$6!
&*/+&!(%!&'#-*+R!6,$!'(!')$!&;$3*-.!#(.$!(%!')$!89!6(..-#4!E+3#$-&$!*+!*+%.-'*(+!-+6!')$!
:(#&$+*+/!(%!')$!89!%(#$*/+!'#-6$!;(&*'*(+!/-1$!#*&$!'(!&;$3,.-'*(+!*+!')$!%(#$*/+!
$23)-+/$!0-#F$'4!!
The$Floating$Exchange$rate$regime$
The$Jamaica$Agreement$
S$1*&$6!')$!E=NQ&!-#'*3.$&!(%!T/#$$0$+'7!#$%.$3'&!')$!+$:!#$-.*'5!(%!%.(-'*+/!$23)-+/$!
#-'$&4!!
Exchange$rates$since$1973$
O$3(0$!0,3)!0(#$!1(.-'*.$!-+6!.$&&!;#$6*3'-@.$4!U-#'.5!6,$!'(!-!+,0@$#!(%!
,+$2;$3'$6!&)(3F&!'(!')$!:(#.6!0(+$'-#5!&5&'$04!!
M)$!0-+-/$6A%.(-'!&5&'$0!>6*#'5A%.(-'!&5&'$0?!"!')$!%#$D,$+35!(%!/(1$#+0$+'!
*+'$#1$+'*(+!*+!')$!%(#$*/+!$23)-+/$!0-#F$'4!!
Fixed$versus$Floating$Exchange$rates$
The$case$for$Floating$Exchange$rates$
Monetary*Policy*autonomy!"!0(+$'-#5!$2;-+&*(+!3-+!.$-6!'(!*+%.-'*(+7!;,'&!
6(:+:-#6!;#$&&,#$!(+!-!%*2$6!$23)-+/$!#-'$4!T+6!1*3$!1$#&-!%(#!0(+$'-#5!
3(+'#-3'*(+4!!
Trade*balance*adjustments!"!*%!-!3(,+'#5!6$1$.(;$6!;$#0-+$+'!6$%*3*'!*+!*'&!
@-.-+3$!(%!'#-6$!')-'!3(,.6!+('!@$!3(##$3'$6!@5!6(0$&'*3!;(.*354!E'!#$D,*#$&!E=N!'(!
-/#$$!'(!3,##$+35!6$1-.,-'*(+4!!
The$case$for$Fixed$exchange$rates$
Monetary*discipline!"!')$!+$$6!'(!0-*+'-*+!-!%*2$6!$23)-+/$!#-'$!;-#*'5!$+&,#$&!
')-'!/(1$#+0$+'&!6(!+('!$2;-+6!')$*#!0(+$5!&,;;.*$&!-'!*+%.-'*(+-#5!#-'$&4!!
Speculation!"!3-+!3-,&$!%.,3',-'*(+&!*+!$23)-+/$!#-'$&4!U(*+'!'(!')$!VQ&!#-;*6!#*&$!
-+6!%-..!6,#*+/!')$!GWHJ&4!!
Uncertainty!"!&,##(,+6*+/!')$!%,',#$!3,##$+35!0(1$0$+'&!')-'!3)-#-3'$#*X$&!
%.(-'*+/!$23)-+/$!#-'$!#$/*0$&4!!
Trade*balance*adjustments!"!'#-6$!6$%*3*'&!-#$!6$'$#0*+$6!@5!')$!@-.-+3$!
@$':$$+!&-1*+/&!-+6!*+1$&'0$+'!*+!-!3(,+'#5R!+('!@5!')$!$2'$#+-.!1-.,$!(%!*'&!
3,##$+354!!
Exchange$rate$regimes$in$practice$
Pegged*exchange*rates!"!-!3(,+'#5!:*..!;$/!')$!1-.,$!(%!*'&!3,##$+35!'(!')-'!(%!-!
0-Y(#!3,##$+35!&(!')-'7!*'&!(:+!3,##$+35!#*&$&!'((4!!
Currency*board*"!3(00*''$6!@5!-!3(,+'#5!'(!3(+1$#'*+/!*'&!6(0$&'*3!3,##$+35!(+!
6$0-+6!*+'(!-+(')$#!3,##$+35!-'!-!%*2$6!$23)-+/$!#-'$4!E'!3-+!*&&,$!-66*'*(+-.!
6(0$&'*3!+('$&!-+6!3(*+&!(+.5!:)$+!')$#$!-#$!%(#$*/+!$23)-+/$!#$&$#1$&4!!
Crisis$Management$by$the$IMF$
Financial*crisis:*1)!3,##$+35!3#*&*&!(33,#&!:)$+!-!&;$3,.-'*1$!-''-3F!(+!')$!
$23)-+/$!1-.,$!(%!-!3,##$+35!#$&,.'&!*+!-!&)-#;!6$;#$3*-'*(+!*+!')$!1-.,$!(%!')$!
3,##$+35!(#!%(#3$&!-,')(#*'*$&!'(!$2;$+6!.-#/$!1(.,0$&!(%!*+'$#+-'*(+-.!3,##$+35!
#$&$#1$&4!Z?!@-+F*+/!3#*&*&!#$%$#&!'(!-!.(&&!(%!3(+%*6$+3$!*+!')$!@-+F*+/!&5&'$0!')-'!
.$-6&!'(!-!#,+!(+!@-+F&4!T!%(#$*/+!6$@'!3#*&*&!*&!-!&*',-'*(+!:)$#$!-!3(,+'#5!3-++('!
&$#1*3$!*'&!%(#$*/+!6$@'!(@.*/-'*(+&7!:)$')$#!;#*1-'$A&$3'(#!(#!/(1$#+0$+'!6$@'4!
M)$5!'$+6!'(!3(00(+.5!,+6$#.5*+/!0-3#($3(+(0*3!3-,&$&B!)*/)!#$.-'*1$!;#*3$!
*+%.-'*(+!#-'$&7!-!:*6$+*+/!3,##$+'!-33(,+'!6$%*3*'7!$23$&&*1$!$2;-+&*(+!(%!6(0$&'*3!
@(##(:*+/7!-+6!-&&$'!;#*3$!*+%.-'*(+4!!
2)*The*Asian*crisis:**
A!E+1$&'0$+'!O((0B!)$-15!@(##(:*+/!%#(0!@-+F!%*+-+3$6!0,3)!(%!')$!3(+&'#,3'*(+&4!
E+1$&'0$+'!@((0!*+!3(00$#3*-.!-+6!#$&*6$+'*-.!;#(;$#'57!*+6,&'#*-.!-&&$'&7!-+6!
*+%#-&'#,3',#$4!!
A!<23$&&!P-;-3*'5B!*+1$&'0$+'&!:$#$!0-6$!(+!')$!@-&*&!(%!,+#$-.*&'*3!;#(Y$3'*(+&!
-@(,'!%,',#$!6$0-+6!3(+6*'*(+&R!#$&,.'*+/!*+!$23$&&!3-;-3*'54!!
A!M)$![$@'!O(0@B!0-&&*1$!*+1$&'0$+'&!*+!*+6,&'#*-.!-&&$'&!-+6!;#(;$#'5!)-6!3#$-'$6!
$23$&&!3-;-3*'5!-+6!;.,+/*+/!;#*3$&7!:)*.$!.$-1*+/!')$!3(0;-+*$&!')-'!)-6!0-6$!')$!
*+1$&'0$+'&!/#(-+*+/!,+6$#!),/$!6$@'!@,#6$+&!')-'!')$5!:$#$!+(:!%*+6*+/!*'!
6*%%*3,.'!'(!&$#1*3$4!!
A!<2;-+6*+/!E0;(#'&B!*+1$&'0$+'&!*+!*+%#-&'#,3',#$7!*+6,&'#*-.!3-;-3*'57!-+6!
3(00$#3*-.!#$-.!$&'-'$!:$#$!&,3F*+/!*+!%(#$*/+!/((6&!-'!,+;#$3$6$+'$6!#-'$&4!!
Evaluating$the$IMFs$policy$prescriptions$
Inappropriate$policies$
A #$;#$&$+'!\(+$A&*X$A%*'&A-..]!-;;#(-3)!'(!0-3#($3(+(0*3!;(.*35!')-'!*&!
*+-;;#(;#*-'$!%(#!0-+5!3(,+'#*$&4!!
A M)$!3$+'#-.!'-&F!(%!E=N!*&!'(!#$@,*.6!3(+%*6$+3$!*+!')$!:(+!%(#!9(,')!^(#$-4!!