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POLI 243 Chapter Notes -Special Drawing Rights, Managed Float Regime, Capital Control

Political Science
Course Code
POLI 243

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Chapter 8
The Importance of International Monetary Regimes
1) Liquidity-Central Banking systems in domestic level have to be replicated in
international monetary regime where states can borrow money to have
2) Confidence-Monetary system to have confidence that one will pay.
3) Money is a public good.
a. Free Riding- countries will take advantage of the regime and would
manipulate the currency value. There is stable system, so you make
use of it, while not directly impacting others. But in monetary system,
it hurts others unlike normal FR.
b. Beggar thy neighbor-lower the value of currency so that its exports are
more competitive. Then, it’s not like free riding because it hurts the
others by selling own goods. Competitive devaluation occurred
1) 4 characteristic
a. Exchange rates
i. Value of currency relative to other currency
ii. Fixed
1. State decide what exactly the currency is worth (ex. Gold)
a. $20.67=1 ounce gold
b. Government allow you to buy 1 ounce of gold with
c. Fixed the currency to other currency (peg the
currency to US dollars) (due to koubairyokuheika?)
d. Stable- you always know how much it is, and you
don’t lose money even if you keep it
e. Too rigid- Market forces impact value of currency
but if it is pegged, it won’t change; causing
distortions in currency. When problem become so

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large, states will change the currency, by large
rates which impact monetary relations greatly
iii. Floating
1. Value decided by market factors
a. Demand for currency
b. Confidence in currency
c. Speculations
d. Dirty Float
i. Exchange rate interventions: buying and
selling currency to influence value
1. Central Bank under state buy own
currency and rise value, or lower by
selling it
2. Flexible, but vulnerable to Opportunism & Volatility
a. Devaluing currency – crash
b. Less confidence
1. Exchange rate
2. Coordinated exchange interventions
a. States agree on some intervention to prevent
beggar thy neighbor
b. Bilateral agreements- to the degree agreed to both
sides; bargain something out between states for
i. Power bargaining occur-big states have the
most power for agreements
3. Responsible (?) manipulation prevents BTN?
b. Reserve Systems

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i. Central Bank of state holds back some money or valued good so
it has a degree of capital to prop up its economy. (more
important in fixed exchange rate, to assure payment)
1. Ex: Gold (intrinsic value)
2. Ex: Hard Currency (US dollar, Euro, UK Sterling, Yen)
3. SDR (Special Drawing Rights)
a. IMF money=money that IMF has, which states can
use as well when bankruptcy danger
c. Capital Movement
i. Full Convertibility-Citizen of a country take own money,
convert it, and invest on somewhere else without capital control
ii. Controlled-state has perfect control
iii. Effects on currency value and interest rates
1. If no control-Increase in investment can lead to inflation,
while decrease can cause rapid currency devaluation
d. Political Management
i. International equivalent of the central bank
1. Constantly making sure of liquidity, and investors have
2. Provide key currency
3. Provide currency to you for sure so that unreasonable loss
won’t occur and provide assurance of no cheating by (law
in domestic) hegemon?
ii. Hegemonic actor=make people agree and follow the rules of the
game (US Breton-Woods)
iii. State provide currency, supply another currency which could
increase revenue, which US when hegemon can benefit (how)
1. In any central banking system where it can produce
currency, there are ways of book keeping which can allow
the system to profit, and increase revenue by creating
money. Canada’s transition from paper dollar to
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