Transcript International monetary system

International monetary
system
Chinese version for
the terminology
P557 case study
The decline and fall of the Britton Woods System. The
story of the Bretton Woods system’s breakdown is
the story of countries’ unsuccessful attempts to
reconcile internal and external balance under its
rule.
1958—1965: … foreign banks converted nearly $2
billion of their holdings into gold in that year. The
year 1960 marked the end of the period of “dollar
shortage”.
1965—1968: the Vietnam military
buildup→U.S. substantial fiscal expansion.
1968—1973: U.S. inflation influenced
speculative sentiments. After massive gold
sales by the Federal Reserve and European
central banks, … the central banks announced
the creation of a two-tier gold market. …
massive private purchases of DM motivated
by expectations that the DM would be
revalued against the dollar. As the Nth
currency, the dollar could be devalued only if
foreign governments agreed to peg their
currencies against the dollar at new rates.
• President Nixon forced the issue on August
15, 1971. First, he ended U.S. gold losses
by announcing the U.S. would no longer
automatically sell gold to foreign central
bank for dollars. Second, he announced a
10% tax on all imports to the U.S.
• On March 19, 1973, the currencies of Japan
and most European countries were floating
against dollar.
Page 568: macroeconomic policy &
coordination under floating exchange rates
• The advocates of floating saw it as a way out of
the conflicts between internal and external balance.
However, some critics describe the post-1973
currency arrangements as an international
monetary “nonsystem,” a free-for-all in
which national macroeconomic policies are
frequently at odds.
The case for floating exchange rates
• World exchange system after 1973
• Chinese version of floating
exchange rate
Three major claims for floating
1. Monetary policy autonomy. No obligation
and no importation of inflation/deflation.
2. Symmetry. U.S. no longer dominate.
3. Exchange rates as automatic stabilizer.
swift adjustment of market-determined
exchange rates would help the countries
to maintained the balance.
The case against floating
exchange rates
1. Discipline. Central banks freed from the
obligation to fix their exchange rates might
embark on inflationary policies.
2. Destabilizing speculation and money
market disturbances. Speculation on changes in
exchange rates could lead to instability in foreign
exchange markets.
3. Injury to international trade and investment.
Floating rates would make relative international
prices more unpredictable.
4. Uncoordinated economic policies. The door would
be opened to competitive currency practices
harmful to the would economy.
5. The illusion of greater autonomy.
Floating exchange rates would not really give
countries more policy autonomy. Changes in
exchange rates would have such pervasive
macroeconomic effects that central banks would
feel compelled to intervene heavily in foreign
exchange markets even without a formal
commitment to peg.
Case study: no clear verdict
• Floating or fixed rate? endless
debate.
• The commodity shocks left most oilimporting countries further from both
internal and external balance than they were
when floating began in 1973.
Revising the IMF’s Charter, 1975-1976
• Revising the IMF’s Charter, 1975-1976.
Because floating rates had seemed to function
well in conditions of adversity, the governments
of the industrialized countries acknowledged late
in 1975 that they were prepared to live with
floating exchange rates for the indefinite future.
The IMF’s directors met at Kingston, Jamaica,
in January 1976 to approve a revision of the
fourth IMF Article of Agreement, which
covered exchange rate arrangement.
• The new Article IV implicitly endorsed floating
rates by freeing each member country to
choose any exchange rate system it prepared.
Governments were urged to follow
macroeconomic policies that would promote
price stability and growth and they were to
avoid “manipulating exchange rates to gain an
unfair competitive advantage over other
members”
Turning-point of 1979
• before 1979: expansion policy (monetary and
fiscal)
• after 1979: cautious towards inflation
• Governments could not be indifferent to the
behavior of exchange rates and inevitably
surrendered some of their policy autonomy in
other areas to prevent exchange rate movements
they viewed as harmful to their economies.
Page 581
Page 590: From the Plaza to the
Louvre and beyond:Trying to manage
exchange rates
• Group of Five countries—the U.S., Britain,
France, Germany, and Japan—announced at
New York’s Plaza Hotel on Sept. 22, 1985, that
they would jointly intervene n the foreign
exchange market to bring about a dollar
depreciation.
• Chinese version for Plaza
agreement
Louvre accord—Target zone
• On Feb. 22, 1987, finance ministers and central
bank governors from the G-5 countries plus
Canada issued a statement pledging to stabilize
nominal exchange rates around the levels then
prevailing.
• These target zones were not made public.
• the implicit zones for exchange rates had no real
force and that the authorities’ reluctance to
announce the zones, rather than keeping the
market guessing…
Target Zone (band)
•
特点：确定各国货币的中心汇率， 并在中
心汇率附近确定一个汇率波动的范围。它即
有浮动汇率的灵活性又有固定汇率的稳定性。
• 区别：(Target Zone vs. Bretton Woods )
1. 它仍是一种浮动汇率形式；只不过是为几种
主要货币的波动规定一个幅度而已。
2. 当汇率波动达到目标区的上下限时，有关国
家可以不承担干预的义务。但必须运用经济
政策调整使汇率回到目标区内。
P592
Japan and East Asia
• The problems of the Japanese economy
spilled over to the developing countries in
East Asia, with which it trades heavily.
• Many of them held their exchange rates fixed,
or in target ranges, against the U.S. dollar.
Japan’s slowdown in 1997 weakened the
East Asian economies directly, but also
through an exchange-rate channel.
• Being tied to the dollar, East Asian currencies
tended to appreciate against the yen as the yen
slid against the dollar. The East Asian
economies, feeling the direct effect of Japan’s
slower growth on the demand for their
imports, simultaneously found their exports
priced out of foreign markets.
What has been learned since 1973?
• Does the empirical study support the views put
forward by the proponents and opponents of
floating rate system?
• Comparison and valuation of the Fixed and
the Floating performances.
Page 595: Figure 19-8
Exchange rate trends
and inflation
differentials, 1973-1997.
Higher inflation has
been associated with
greater currency
depreciation.
Monetary policy autonomy
• PPP is a major factor behind long-run nominal
exchange-rate variability.
• In the short run, the effects of monetary/fiscal
changes are transmitted across national borders
under floating rate. →Floating rates would not
insulate countries completely from foreign
policy shocks.
• No central bank can be indifferent to its
currency’s value in the foreign exchange
market.
Why did central bank intervene?
1. stabilize output and the price level
2. fear about the loss of international
competitiveness.
3. worry about temporary exchange rate
shifts might have medium-term
inflationary effects.
Symmetry
• Central banks continue to hold dollar
reserves and intervene, the international
monetary system did not become symmetric
after 1973.
The exchange rate as an
automatic stabilizer
• Under floating, many countries were able to
relax the capital controls put in place earlier.
• Floating help to cushion disturbances for
some sectors while hurting other sectors.
• Poor economic performances can not be
related to the floating.
Discipline
• Both the fixed and the floating place no
discipline on any government and central
bank.
Destabilizing speculation
• Over the longer term, exchange rates have
roughly reflected fundamental changes in
monetary and fiscal policies, and their broad
movements do not appear to be the result of
destabilizing speculation.
• No clear indication: linkage between the
floating and destabilizing speculation.
International trade &
investment
• There is controversy about effects of floating
rates on international trade.The use of
forward markets and other derivatives
expanded dramatically…. cost of avoiding
exchange rate risk is just like international
transport cost.
• It is hard to tell which factors slowdown the
growth of international trade and investment.
Policy coordination
• Floating exchange rates themselves have not
promoted international policy coordination.
• Governments, like people, often are motivated
by their own interest rather than that of the
community. However, the governments can not
be penalized.
Are fixed exchange rates even an
option for most countries?
• “Trilemma” will be discussed in the end of
this course. Choice of the fixed exchange rate
will rest on other conditions (freedom of capital
flow, and autonomy of monetary policy).
• Speculative attacks on fixed exchange rate
arrangement would continue …
Directions for reform
• No exchange rate system works well when
countries “go it alone” and follow narrowly
perceived self-interest.
• The worst problems of the floating-rate
system occurred when countries failed to
take coordinated action on common
macroeconomic problems.
Reform of International Monetary System
• Current proposals to reform the international
monetary system run the gamut from a more elaborate
system of target zones for the dollar to the
resurrection of fixed rates to the introduction of a
single world currency. Because countries seem
unwilling to give up the autonomy floating dollar rates
have given them, it is unlikely that any of these
changes is in the cards. With greater policy
cooperation among the main players, there is no
reason why floating exchange rates should not
function well in the future.