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International Business Funvtions

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18 views52 pages

International Business Funvtions

Uploaded by

Justine Figueroa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The International

Monetary System
Global and International & Trade
Prof. Alfred Lositaño
Group 7
Learning Objectives
After reading this chapter, you will be able to:

Describe the historical development of the modern global monetary system.


Explain the role played by the World Bank and the IMF in the international monetary system.
ldentify exchange rate regimes used in the world today and why countries adopt different exchange rate regimes.
Compare and contrast the differences between a fixed and a floating exchange rate system.
Understand the debate surrounding the role of the IMF in the management of financial crises.
Explain the implications of the global monetary system for management practice.

The International Monetary System


Discussion
Introduction
The Gold Standard
Mechanics of The Gold Standards
Strength of The Gold Standards
The Period Between The Wars
The Bretton Woods System
The Role of IMF
The Role of World Bank
Dardo, Bernadette B.
Reporter
International Monetary
System
Refers to the institutional arrangements that
countries adopt to govern exchange rates.

The International Monetary System


Floating Pegged
Exchange Exchange
Rate Rate

Types of Exchange
Dirty Fixed Rate Systems
Float Exchange
System Rate

The International Monetary System


The Gold Standard Era
A historical practice where currencies were
linked to gold, allowing a specific amount
of gold to be exchanged for a certain
amount of currency.

The International Monetary System


Discipline against competitive
devaluations and monetary
discipline through control of
inflation

Strengths of the Gold


Standard
Balance-of-trade equilibrium.

The International Monetary System


Gold U.S., Britain,
standard and France
collapsed tried to
during WWI. restore it.

The Period Between


Competitive By 1939, the the Wars (1918-1939)
devaluations gold standard
eroded trust. was gone.

The International Monetary System


The Bretton Woods conference in
1944 established a new international
monetary system with fixed exchange
rate, maintained by the international
monetary fund.

Bretton Woods System

It aimed to avoid competitive


devaluations.

The International Monetary System


World Bank and the
International Monetary Fund
The IMF maintained order in the international
monetary system while the world bank
promoted economic development by
providing financial support.

The International Monetary System


Role of the International
Monetary Fund
The aim of the IMF what to try to avoid a
repetition of the chaos through a
combination of Discipline and Flexibility.

The International Monetary System


International Bank for
Reconstruction and
Development (IBRD).

Role of the World


International
Development Bank
Associations
(IDA)

The International Monetary System


Discussion
The Collapse of Fixed Exchange Rate
System
The Floating Exchange Rate Crime
The Jamaica Agreement
Exchange Rates 1973
Fixed Versus Floating Exchange Rates
The Case for Floating Exchange Rates
Monetary Policy Autonomy
Calpotura, Ann Jeanette E. Trade Balance Adjustments

Reporter
The International Monetary System

The Collapse of the Fixed


Exchange Market System

The system worked well until the


The Bretton Woods system was a
late 1960s, when the US began to
system of fixed exchange rates
run a large balance of payments
established in 1944.
deficit and inflation began to rise.
The International Monetary System

The Floating Exchange Rate Crime


The floating exchange rate regime that followed the collapse of the
fixed exchange rate system was formalized in January 1976, when IMF
members met in Jamaica and agreed to the rules for the international
monetary system that are in place today.
The International Monetary System

The Jamaican Agreement


The Jamaica meeting revised the IMF’s Articles of Agreement to reflect
the new reality of floating exchange rates.

Provisions of Jamaican Agreement in 1976

Floating rates were Gold was abandoned Increase in IMF


acceptable. as a reserve asset. quotas.
The International Monetary System

Exchange Rates Since 1973

Loss of Unexpected rise in


1971 Oil 1979 Oil
confidence the dollar between
crisis. crisis.
in dollars. 1980 and 1985.
The International Monetary System

Exchange Rates Since 1973

The global financial crisis


Rapid fall of the Partial collapse of
1997 Asian of 2008–2010 and the
U.S. dollar the European
currency sovereign debt crisis in the
against the yen Monetary System
crisis. European Union during
and Deutsche. in 1992.
2010–2011.
The International Monetary System

Fixed Versus Floating Exchange Rates


The International Monetary System

The Case for Floating Exchange Rates


The case in support of floating exchange rates has three main elements:
monetary policy autonomy, automatic trade balance adjustments, and
economic recovery following a severe economic crisis.
The International Monetary System

Monetary Policy Autonomy


A country's ability to independently and flexibly manage its monetary
policy to achieve specific economic objectives without external
constraints or influences.
The International Monetary System

Trade Balance Adjustments


Trade balance adjustments refer to the changes or corrections made in a country's trade balance,
which is the difference between the value of its exports (goods and services sold to other
countries) and the value of its imports (goods and services purchased from other countries) over a
specified period, typically a year or a month. Trade balance adjustments can occur for various
reasons and are aimed at achieving a more favorable trade balance or correcting imbalances.
Discussion
Crisis Recovery
The Case for Fixed Exchange Rates
Monetary Discipline
Speculation and Floating Exchange
Uncertainty of Floating Exchange
Trade Balance Adjustments and
Economic Recovery
Exchange Rates Regime in Practice

Dedicatoria, Cherie Mae Z. Pegged Exchange Rates

Reporter
Floating exchange rates can help
countries recover from economic
crises by making exports more
competitive.
Crisis Recovery with
Floating Exchange
This is because when a country's
Rates currency declines, it makes its
exports cheaper for foreign buyers.

Examples include Iceland and South


Korea, which recovered from
economic crises using export-led
recoveries.
The Case for Fixed
Exchange Rates
The case for fixed exchange rates rests on arguments
about monetary discipline, speculation, uncertainty,
and the lack of connection between the trade balance
and exchange rates.

The International Monetary System


Fixed exchange rates force
governments to maintain a
disciplined monetary policy.

Monetary
Discipline with Governments cannot expand their
Fixed Exchange money supplies at inflationary rates
without causing their currency to
Rates depreciate.

This helps to prevent inflation.


Critics of floating exchange rate
regimes argue that speculation can
cause fluctuations in exchange rates.

Speculation and
Floating Exchange
This can damage a country's
Rates economy by distorting export and
import prices.

Fixed exchange rates can limit the


destabilizing effects of speculation.
Floating exchange rates can add to
uncertainty for businesses and
consumers.

Uncertainty and
Floating Exchange
This uncertainty can make it difficult
Rates to plan for international trade and
investment.

Fixed exchange rates can reduce


uncertainty and promote
international trade and investmet.
Advocates of floating exchange rates
argue that they help adjust trade
imbalances and can assist with
economic recovery after a crisis.
Trade Balance
Adjustments and
Economic Critics argue that trade deficits are
determined by the balance
Recovery between savings and investment in
a country, not by the external value
of its currency. They also argue that
depreciation in a currency will lead
to inflation, which will wipe out any
apparent gains in cost
competitiveness.
Managed float: Governments
intervene in the foreign exchange
market to limit fluctuations in the
exchange rate.
Exchange Rate
Regimes in Practice
Currency peg: Governments fix the
exchange rate to another currency
Governments around the world
or basket of currencies.
pursue a variety of exchange rate
regimes, ranging from pure free
floats to pegged systems.

Adjustable peg: Governments allow


the exchange rate to fluctuate
within a target zone.
A country fixes the value of its
currency to another currency or
basket of currencies.

Pegged
Exchange Rates Pegged exchange rates impose
monetary discipline and lead to low
inflation.

Pegged exchange rates can be


difficult to maintain, especially for
smaller countries with capital
outflows and currency speculation.
Discussion
Currency Board
Crisis Management by IMF
Financial Crisis in the Post-Bretton
Woods Era
Evaluating the IMF's Policy Prescription
Inappropriate Policies
Moral Hazard

Cabuyao, Elaine Clarice P.


Reporter
Currency Board
A currency board is a monetary system where a country's central bank or monetary authority
maintains a fixed exchange rate between its domestic currency and a foreign currency.

Prominent instances Hong Kong did this This helped Hong In late 1997, interest
of this system can with the U.S. dollar. Kong during a crisis rates in Hong Kong
be observed in For every 7.80 Hong in 1997 when other even reached 20
Hong Kong, Estonia, Kong dollars = 1 U.S Asian currencies percent because people
and Bulgaria. dollar. were losing value. wanted U.S. dollars.

The International Monetary System


Crisis Management by the IMF
The IMF, or International Monetary Fund, was originally created to help countries borrow
money in the short term to fix their financial problems and keep their exchange rates stable.

In 1997, the IMF gave over During the global financial In 2009, the IMF's
$110 billion to three crisis in 2008, the IMF gave
members agreed to
troubled Asian countries - more than $100 billion in
South Korea, Indonesia, loans to countries like Latvia, increase its resources
and Thailand. Greece, and Ireland. to $750 billion.

The International Monetary System


Financial Crisis in the
Post-Bretton Woods Era
In the past 30 years, there have been various types of
financial crises that required the intervention of
organizations like the IMF.

The International Monetary System


Currency Crisis
This occurs when people start to doubt the value of a
country's currency.

The International Monetary System


Banking Crisis
This happens when people lose trust in the banking
system, leading to a rush of people and companies
trying to take their money out of banks.

The International Monetary System


Foreign Debt Crisis
This occurs when a country is unable to meet its
obligations for debts owed to foreign entities, whether
it's debt held by the government or by private
companies.

The International Monetary System


Evaluating the IMF’S Prescription
The IMF provides financial aid to countries facing
economic or currency crises, but this assistance comes
with conditions. However, these approaches have
faced significant criticism, leading to some changes in
the IMF's approach.

The International Monetary System


Inappropriate Policy
Critics argue that the IMF's traditional policy approach is too rigid and not suitable for all
countries. They point to the 1997 Asian crisis, where the IMF's tight economic policies were
criticized for not addressing private-sector debt issues causing deflation.

IMF's traditional policy Argument that this would


Criticism that IMF applied
prescriptions criticized for lead to a recovery of the
policies for high inflation to
being too uniform and not won's value, reducing
South Korea, which was not
adaptable to specific dollar-denominated debt
facing such a situation.
country circumstances. burden for South Korea.

The International Monetary System


Moral Hazard
Critics argue that the IMF's intervention in financial crises can worsen a problem known as
moral hazard. This term refers to a situation where individuals or entities take excessive risks
because they know that they will be rescued if things go wrong.

Critics argue that The IMF is If Japanese or Western


Japanese and Western banks
banks should face reducing the banks were forced to
criticized for lending large
consequences for likelihood of debt write off loans due to
amounts of capital to
their risky lending, default, effectively widespread default, the
overleveraged Asian
even if it means some bailing out banks consequences could
companies during the boom
years of the 1990s.
banks may have to responsible for have been difficult to
close down. risky loans. manage.

The International Monetary System


Discussion
Lack of Accountability
Observations
Currency Management
Business Strategy
Strategic flexibility
Airbus and the Euro Case Study
IMF and World Bank Impact
Corporate and Government Relations
Medallada, Ralph B.
Reporter
IMF criticized for lacking Calls for reforms and more
accountability despite external expertise and
significant influence. scrutiny.

Lack of Accountability

The International Monetary System


Challenges in
Some IMF adapting
Mixed opinions on forcing countries
successes like its policies in
the appropriateness to implement
containing response to
of IMF policies. corrective
crises. global events.
actions.

Observations

The International Monetary System


Foreign exchange market is a Companies must adapt to
mixed system with government volatility and use risk
intervention and speculation. management tools.

Currency Management

The International Monetary System


Exchange rate movements Forward exchange
Suggests strategies for
are unpredictable and market used but not
strategic flexibility.
impact competitiveness. perfect.

Business Strategy

The International Monetary System


Companies can hedge against currency
Contracting out manufacturing
fluctuations through strategies like
is an option for low-value-
production dispersal and overseas
added goods.
expansion.

Strategic Flexibility

The International Monetary System


Airbus faced profit challenges Airbus responded by reducing costs
due to the strong Euro against and shifting suppliers to reduce its
the US Dollar. economic exposure.

Airbus and the Euro Case Study

The International Monetary System


IMF's policies can lead to short- Long-term IMF policies may
term demand contraction, promote economic growth,
affecting international businesses. offering business opportunities.

IMF and World Bank Impact

The International Monetary System


Businesses influence government
Promoting a stable system for
policies in the international
trade and investment is crucial.
monetary system.

Corporate-Government Relations

The International Monetary System


The International
Monetary System

Group 7

Cabuyao, Elaine Clarice P.


Calpotura, Ann Jeanette E.
Dardo, Bernadette B.
Dedicatoria, Cherie Mae Z.
Medallada, Ralph B.

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