The International Financial System

Giddy

Exchange Rate Systems and Policies/1

The International

Financial System

Prof. Ian Giddy

New York University

Global Financial Architecture

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l

l

Institutions

Issues

Exchange-rate system

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 2

Giddy

Exchange Rate Systems and Policies/2

Global Financial Architecture

l

l

l

Institutions

Governments

Issues

Exchange-rate system

Governments

World Bank

Central

Banks

International

Monetary

Fund

Banks

Investors

Financial

Markets

Copyright ?2002 Ian H. Giddy

Businesses

Exchange Rate Systems and Policies 3

Alternative Bank-Industry Linkages

Individuals

The EquityMarket

System

Banks

The BankBased

System

Banks /

Investment Vehicles

The BankIndustrial

Crossholding

System

Investment Vehicles

Industrial Companies

Individuals

Investment

Vehicles & Insurance

Industrial Companies

Individuals

Banks

Investment

Vehicles & Insurance

Industrial Companies

Industrial Companies

The Statecentered

System

Banks /

Investment Vehicles

Investment

Vehicles & Insurance

State Institutions

Industrial Companies

Copyright ?2002 Ian H. Giddy

Individuals

Industrial Companies

Exchange Rate Systems and Policies 4

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Exchange Rate Systems and Policies/3

Global Financial Architecture

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l

l

Institutions

Issues

Exchange-rate system

n

Reasons for the boom-bust character of

capital flows to emerging market

economies?

n

What measures should be taken to deal

with the instability of capital flows?

n

Role of IMF? Conditionality?

n

Role of World Bank? Conditionality?

n

Role of private sector institutions?

n

Exchange rate regime?

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 5

Global Financial Architecture

l

l

l

Institutions

Issues

Exchange-rate system

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 6

Giddy

Exchange Rate Systems and Policies/4

Exchange-Rate Systems

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Some history

What is ¡°the international monetary system¡±

today?

Fixed versus floating exchange rates

The balance of payments and the adjustment

process

The European Monetary System

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 7

History of the World

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Gold, inflation and exchange rates: the first

100 years

War, depression and competitive devaluation

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Bretton Woods

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1971 and floating rates

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Currency blocs?

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Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 8

Giddy

Exchange Rate Systems and Policies/5

To Fix or To Float, That is the Question

Independent free float

Floating

Economic

circumstances,

and

Economic

policies

Managed float

Frequent devaluations or

revaluations

Crawing peg

Tied by formula to inflation

index

Basket peg

Fixed

Pegged to one currency

Absolutely fixed to one

currency

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 9

The Balance of Payments

Transylvania¡¯s Balance of Payments

Debits

Exports ( goods sold to foreigners)

Imports (goods bought from

foreigners)

Services, like tourism (and

interest paid/received

Aid (a ¡°plug¡±)

Financial and real assets sold to

foreigners (¡°capital inflows¡±)

Financial and real assets bought

from foreigners (¡°capital outflows¡¯)

Government¡¯s financial assets sold

(Foreign exchange reserves reduced)

Government¡¯s financial assets

bought (Foreign exchange

reserves increased)

Errors and Omissions

Total

Copyright ?2002 Ian H. Giddy

Cred its

11

-16

-2

Trade

Balance

-5

3

Current

Account

Balance

-3

1

3

Overall

Balance

-2

-2

3

-1

-21.00

21.00

Exchange Rate Systems and Policies 10

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