2. INTRODUCTION TRADE AND EXCHANGE OF GOODS/SERVICES OR FACTORS OF PRODUCTION HAS BEEN FACILITATED BY THE EVOLUTION OF MONEY A SOVEREIGN NATION EXERCISES ITS AUTHORITY TO ISSUE LEGAL TENDER MONEY. THIS HAS ACCEPTABILITY WITHIN THE GEOGRAPHICAL BOUNDARIES OF THE NATION
3. INTRODUCTION SPECIALIZATION AND DIVISION OF LABOUR GENERATE GAINS FOR EVERYONE. THIS IS MADE POSSIBLE ONLY WHEN THERE IS A RELIABLE MONETARY MECHANISM(MAINTENANCE OF ORDER IN THE FUNCTIONING OF A CURRENCY) THE SAME IS TRUE FOR TRADE AND FINANCE ACROSS THE BORDERS.
4. THE INTERNATIONAL MONETARY SYSTEM IN INTERNATIONAL TRADE AND FINANCE, WE REQUIRE AN INTERNATIONAL ARRANGEMENT BETWEEN TRADING NATIONS ABOUT EXCHANGE RATES AND THE POSSIBLE CONVERSION OF CURRENCIES. SUCH AN ARRANGEMENT IS CALLED THE INTERNATIONAL MONETARY SYSTEM IT IS A PART OF THE INTERNATIONAL FINANCIAL SYSTEM.
5. INTERNATIONAL FINANCIAL SYSTEM THIS IS A BROAD TERM ENCOMPASSING TRANSFER OF FUNDS BETWEEN PARTIES ACROSS BORDERS CONVERSION OF NATIONAL CURRENCIES ACQUISITION/LIQUIDATION OF FINANCIAL ASSETS ACROSS BORDERS, AND INTERNATIONAL CREDIT CREATION IT IS MULTILATERAL IN NATURE
6. STUDY OF THE INTERNATIONAL MONETARY SYSTEM IT SHOULD ENCOMPASS:- EXCHANGE RATE REGIMES LIQUIDITY-AVAILABILITY OF RESERVES THE INTERNATIONAL MONETARY FUND THE ADJUSTMENT PROCESS-TO COPE WITH SPECIFIC IRREGULARITIES/PROBLEMS CURRENCY BLOCKS AND UNIONS OF REGIONS LIKE ECU AND EMU
7. EXCHANGE RATE REGIMES-AN INTRODUCTION WHAT IS AN EXCHANGE-RATE REGIME? IT MEANS AN UNDERSTANDING/AGREEMENT BETWEEN ACTIVELY TRADING NATIONS ABOUT THE VALUES OF THEIR RESPECTIVE DOMESTIC CURRENCIES THE OBJECTIVE BEING TO ENSURE STABILITY AND PREDICTABILITY OF MARKET-DETERMINED RATES OF EXCHANGE
8. EXCHANGE RATE REGIMES-AN INTRODUCTION THE EMPHASIS IS ON EACH GOVERNMENT TO MAINTAIN ADEQUATE GOLD (OR DOLLAR*) RESERVES, AND TO EXERCISE DISCRETION SO AS NOT TO ALLOW THE DOMESTIC CURRENCY TO EITHER DRASTICALLY APPRECIATE OR DEPRECIATE. SHARP CHANGES CREATE UNCERTAINTY-THEY BENEFIT SOME AT THE EXPENSE OF OTHERS. * under gold-exchange standard followed in the Bretton Woods system
9. EXCHANGE RATE REGIMES-THE 3 PRINCIPAL REGIMES GOLD-SPECIE STANDARD: THIS IS THE OLDEST MONETARY STANDARD. UNDER THIS REGIME COINS MUST CARRY A KNOWN QUANTITY OF GOLD SO THAT DIFFERENT CURRENCIES COULD BE EXCHANGED FOR TRADE GOLD-BULLION STANDARD: HERE, A CURRENCY NOTE/COIN IN CIRCULATION HAS TO BE BACKED BY A KNOWN QUANTITY OF GOLD RESERVE OF THE ISSUING AUTHORITY. THESE ARE THE 2 VARIANTS OF THE GOLD STANDARD-ALSO REFERRED TO AS THE MINT-PARITY STANDARD.
10. EXCHANGE RATE REGIMES-THE BRETTON WOODS SYSTEM THIS IS AN AGREEMENT UNDER WHICH THE DOMESTIC CURRENCY IS OFFERED TO BE EXCHANGED AT A FIXED RATE WITH THE DOLLAR. THE DOLLAR IS ITSELF ON A GOLD BULLION STANDARD THIS IS ALSO CALLED THE GOLD-EXCHANGE STANDARD. IT EVOLVED AFTER WORLD-WARII
11. EXCHANGE RATE REGIMES-THE BRETTON WOODS SYSTEM IT GAVE AN IMPORTANT STATUS TO THE DOLLAR THE USA GAVE A COMMITMENT TO MAINTAIN THE GOLD RESERVES I.E. THE GOLD BULLION STANDARD. THIS COMMITMENT LASTED TILL ABOUT 1970 WHEN USA RENEGED ITS COMMITMENT TO CONVERT DOLLARS AT A FIXED RATE OF $35/OUNCE
12. BRETTON WOODS SYSTEM-SOME NOTEWORTHY FEATURES DOLLAR VALUE IN TERMS OF GOLD FIXED EACH OTHER CURRENCY HAD A KNOWN EXCHANGE VALUE OF THE DOLLAR WITH THE LOCAL CURRENCY-THE ‘CENTRAL PARITY ‘. NATIONS WERE OBLIGED TO SELL/BUY DOLLARS IN ORDER TO MAINTAIN THE MARKET DETERMINED EXCHANGE RATES WITHIN A +/- RANGE OF 1% ON EACH SIDE.
13. BRETTON WOODS SYSTEM-SOME NOTEWORTHY FEATURES SO, MEMBER NATIONS WERE OBLIGED TO SELL DOLLARS IF DOLLAR APPRECIATED BEYOND 1% ABOVE THE CENTRAL PARITY. THEY HAD TO MAINTAIN SUFFFICIENT DOLLAR RESERVES IN ORDER TO DO IT. THEY HAD TO BUY DOLLARS WITH LOCAL CURRENCY IN CASE DOLLAR DEPRECIATED LOWER THAN 1%BELOW THE CENTRAL PARITY(RUNNING THE PRINTING PRESS)
14. BRETTON WOODS SYSTEM-SOME NOTEWORTHY FEATURES THESE UPPER AND LOWER LEVELS OF THE MARKET-DETERMINED DOLLAR VALUE WERE CALLED THE ‘SUPPORT POINTS’. GOVERNMENTS OF MEMBER NATIONS WERE TO ENSURE THAT THE MARKET VALUE OF THE DOLLAR WAS WITHIN THE BAND. IF IT WAS PERSISTENTLY RISING BEYOND IT, THE GOVERNMENT COULD GET THE CENTRAL PARITY RAISED I.E. GET THE DOMESTIC CURRENCY DEVALUED.
15. BRETTON WOODS SYSTEM-SOME NOTEWORTHY FEATURES DOMESTIC PRESSURES AND CERTAIN INTERNATIONAL CONDITIONS ENSURED THAT THE USA ABOLISHED THE GOLD BULLION STANDARD. BY 1971, THE WORLD MOVED TO ‘FLOATING EXCHANGE RATES’. THIS PHASE ALSO CREATED REGIONAL BLOCKS LIKE EUROPEAN MONETARY SYSTEM.
16. THE RANGE OF VARIATIONS SINCE 15TH AUGUST 1971, AFTER USA GAVE UP THE BRETTON WOODS COMMITMENT OF MAINTAINING A CONSTANT DOLLAR VALUE IN TERMS OF GOLD OF $35/OUNCE, THERE HAVE BEEN VARIATIONS OF THE EXCHANGE RATE SYSTEM ADOPTED BY MEMBER NATIONS. SPECTRUM OF FLOATING EXCHANGE RATES-THERE ARE 8 PRINCIPAL VARIATIONS WITH FEATURES OF FIXED AND FLOATING RATES
17. THE 8 PRINCIPAL TYPES OF EXCHANGE-RATES AND THEIR FEATURES ECUADOR, PANAMA ACCEPT THE DOLLAR AS LEGAL TENDER. THIS IS CALLED DOLLARIZATION/EUROISATION CURRENCY BOARD-THERE IS A LEGAL COMMITMENT TO EXCHANGE LOCAL CURRENCY WITH A FOREIGN CURRENCY AT A SPECIFIED RATE.LOCAL CURRENCY IS FULLY BACKED BY FOREIGN EXCHANGE RESERVES-ARGENTINA, HONG KONG FIXED PEG: SIMILAR TO BRETTON WOODS, BUT THE PEG IS AGAINST EITHER A CURRENCY OR TO A BASKET(WEIGHTED AVERAGES). +/-1% ABOUT THE CENTRAL PARITY IS ALLOWED. CHINA TILL RECENTLY.
18. THE 3 LIMITED FLEXIBILITY REGIMES PEGGED WITHIN HORIZONTAL BANDS: HERE, THE BANDS ARE ALLOWED TO BE WIDER THAN +/- 1%. CRAWLING PEG: THE PEG-RATE IS PERIODICALLY ADJUSTED AT DISCRETION OF THE GOVERNMENTS OR ACCORDING TO PRE-DETERMINED CRITERIA. CRAWLING BANDS: LIKE ABOVE, CENTRAL PARITY IS ADJUSTED PLUS CERTAIN MARGINS ABOUT IT ARE ALLOWED. ABOUT 30 NATIONS COMPRISE THESE TYPES
19. MANAGED FLOATS AND INDEPENDENT FLOATS MANAGED FLOAT: ACTIVE INTERVENTION BY CENTRAL BANKS IN THE FOREIGN EXCHANGE MARKETS TO INFLUENCE PREVAILING EXCHANGE RATES-BUT NO COMMITMENT TO SET ANY PRE-DETERMINED PATTERN. INDEPENDENT FLOAT: MINIMAL INTERVENTION BY THE CENTRAL BANK AND THE RATES ARE ALMOST ENTIRELY MARKET-DETERMINED. ABOUT 75 NATIONS INCLUDING BHARAT ARE UNDER THESE CATEGORIES.
20. IDEAL EXCHANGE RATE? THE WORLD HAS SEEN 3 PHASES OF EXCHANGE RATE REGIMES:- GOLD STANDARD(FIXED RATES) TILL WORLD WAR I, ADJUSTABLE PEG(BRETTON WOODS) 1944-1973, FLOATING RATES 1973 ONWARDS IMPOSSIBLE TO ACHIEVE AT A TIME THE THREE MAIN OBJECTIVES: STABILITY; INTEGRATION WITH GLOBAL FINANCIAL SYSTEM; MONETARY POLICY FREEDOM
21. THE IMPOSSIBLE TRINITY RATE STABILITY; INTEGRATION WITH ROW; MONETARY FREEDOM CAN BE ATTEMPTED USING THE THREE POLICY TOOLS OF:- CURRENCY UNION/BOARD: IMPOSSIBLE TO RETAIN MONETARY FREEDOM FLOAT: CAN’T GUARANTEE STABILITY CAPITAL CONTROLS(RESTRICTIONS ON FLOW OF FUNDS): INTEGRATION WITH ROW DENIED
