MODULE 2 INTERNATIONAL MONETARY SYSTEM

1
LEARNING OBJECTIVES

01 02 03 04 05 06
Explore how the Examine how the Describe the tradeoff Explain the dramatic Study the Evaluate trends in
international choice of fixed a nation must make choices the creation complexity of global reserve
monetary system versus flexible between a fixed of a single currency exchange rate currencies and how
has evolved from exchange rate exchange rate, for Europe—the regime choices the introduction of
the days of the gold regimes is made by monetary euro—required of faced by many digital currencies
standard to today’s a country in the independence, and the European emerging market may impact the
eclectic currency context of its desires freedom of capital Union’s member countries today future of the
arrangement for economic and movements—the states including China international
social independence impossible trinity monetary system
and openness

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EXHIBIT 2.1
The Evolution and Eras of the Global Monetary System

For long description, see slide 46: Appendix 1

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HISTORY OF THE INTERNATIONAL
MONETARY SYSTEM (1 OF 8)

 The Gold Standard (1876–1913)

 Gold has been a medium of exchange since 3000 BC
 “Rules of the game” were simple, each country set the
rate at which its currency unit could be converted to a
weight of gold
 Currency exchange rates were in effect “fixed”
 Expansionary monetary policy was limited to a
government’s supply of gold
 Was in effect until the outbreak of WWI when the free
movement of gold was interrupted

4
HISTORY OF THE INTERNATIONAL
MONETARY SYSTEM (2 OF 8)

 The Inter-War Years & WWII (1914–1944)

 During this period, currencies were allowed to fluctuate
over a fairly wide range in terms of gold and each other
 Increasing fluctuations in currency values became
realized as speculators sold short weak currencies
 The United States adopted a modified gold standard in
1934
 During WWII and its chaotic aftermath the U.S. dollar
was the only major trading currency that continued to
be convertible

5
HISTORY OF THE INTERNATIONAL MONETARY
SYSTEM (3 OF 8)

 Bretton Woods and the International Monetary Fund

(1944)
 As WWII drew to a close, the Allied Powers met at
Bretton Woods, New Hampshire, to create a post-war
international monetary system
 The Bretton Woods Agreement established a U.S.
dollar-based international monetary system and
created two new institutions the International
Monetary Fund (IMF) and the World Bank

6
HISTORY OF THE INTERNATIONAL
MONETARY SYSTEM (4 OF 8)
 The International Monetary Fund is a key institution in
the new international monetary system and was
created to:
 Help countries defend their currencies against
cyclical, seasonal, or random occurrences
 Assist countries having structural trade problems if
they promise to take adequate steps to correct
these problems
 Special Drawing Right (SDR) is the IMF reserve
asset, currently a weighted average of four
currencies
 The International Bank for Reconstruction and
Development (World Bank) helped fund post-war
reconstruction and has since then supported general
economic development

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HISTORY OF THE INTERNATIONAL MONETARY
SYSTEM (5 OF 8)
 Fixed Exchange Rates (1945–1973)
 The currency arrangement negotiated at Bretton Woods
and monitored by the IMF worked fairly well during the
post-WWII era of reconstruction and growth in world
trade
 However, widely diverging monetary and fiscal policies,
differential rates of inflation and various currency shocks
resulted in the system’s demise
 The U.S. dollar became the main reserve currency held
by central banks, resulting in a consistent and growing
balance of payments deficit which required a heavy
capital outflow of dollars to finance these deficits and
meet the growing demand for dollars from investors and
businesses

8
HISTORY OF THE INTERNATIONAL MONETARY
SYSTEM (6 OF 8)

 Eventually, the heavy overhang of dollars held by

foreigners resulted in a lack of confidence in the ability of
the U.S. to met its commitment to convert dollars to gold
 The lack of confidence forced President Richard Nixon to
suspend official purchases or sales of gold by the U.S.
Treasury on August 15, 1971
 This resulted in subsequent devaluations of the dollar
 Most currencies were allowed to float to levels determined
by market forces as of March 1973

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HISTORY OF THE INTERNATIONAL MONETARY
SYSTEM (7 OF 8)

 The Floating Era (1973–1997)

 Since March 1973, exchange rates have become much more
volatile and less predictable than they were during the
“fixed” period
 There have been numerous, significant world currency
events over the past 30 years
 The volatility of the U.S. dollar exchange rate index is
illustrated in Exhibit 2.2

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EXHIBIT 2.2
Bank for International Settlements Index of the Dollar

Source: BIS.org Nominal exchange rate index (narrow definition) for the U.S. dollar (NNUS)

For long description, see Appendix 2

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HISTORY OF THE INTERNATIONAL MONETARY
SYSTEM (8 OF 8)

 The Emerging Era (1997–present)

 Emerging market economics are multiplying in
number and growing in complexity
 This results in a growing number of emerging
market currencies

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IMF CLASSIFICATION OF CURRENCY REGIMES
Exhibit 2.3 presents the IMF’s regime classification methodology in effect since January 2009

• Countries that have given up their own sovereignty over monetary policy
Category 1: Hard Pegs • E.g., dollarization or currency boards

Category 2: Soft Pegs • A K A fixed exchange rates, with five subcategories of classification

Category 3: Floating • Mostly market driven, these may be free floating or floating with
Arrangements occasional government intervention

• The remains of currency arrangements that do not fit the previous

Category 4: Residual categorizations

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Rate Classification 2009 de facto System Description and Requirements
Hard Pegs Arrangement with no separate legal tender The currency of another country circulates as the sole legal
tender (formal dollarization), as well as members of a
monetary or currency union in which the same legal tender is
shared by the members.
Hard Pegs Currency board arrangement A monetary arrangement based on an explicit legislative
commitment to exchange domestic currency for a specific
foreign currency at a fixed exchange rate, combined with
restrictions on the issuing authority. Restrictions imply that
domestic currency will be issued only against foreign
exchange and that it remains fully backed by foreign assets.

EXHIBIT 2.3 (1 OF 4)
IMF EXCHANGE RATE CLASSIFICATIONS

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Rate Classification 2009 de facto System Description and Requirements
Soft Pegs Conventional pegged A country formally pegs its currency at a fixed rate to another currency
arrangement or a basket of currencies of major financial or trading partners. Country
authorities stand ready to maintain the fixed parity through direct or
indirect intervention. The exchange rate may vary around a central
plus or minus one percent

rate or may vary no more than 2% for a six-month period.

Soft Pegs Stabilized arrangement A spot market rate that remains within a margin of 2% for six months or
1%
more and is not floating. Margin stability can be met by either a single
currency or basket of currencies (assuming statistical measurement).
Exchange rate remains stable as a result of official action.

Soft Pegs Intermediate pegs: Crawling peg Currency is adjusted in small amounts at a fixed rate or in response to
changes in quantitative indicators (e.g., inflation differentials).

EXHIBIT 2.3 (1 OF 4)
IMF EXCHANGE RATE CLASSIFICATIONS

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Rate Classification 2009 de facto System Description and Requirements
Soft Pegs Crawl-like arrangement Exchange rate must remain with a narrow margin of 2%
relative to a statistically defined trend for six months or more.
Exchange rate cannot be considered floating. Minimum rate of
change is greater than allowed under a stabilized
arrangement.
Soft Pegs Pegged exchange rate within horizontal bands The value of the currency is maintained within 1% of a fixed
central rate, or the margin between the maximum and
minimum value of the exchange rate exceeds 2%. This
includes countries that are today members of the Exchange
Rate Mechanism II (ERM II) system.

Floating Arrangements Floating Exchange rate is largely market determined without an

ascertainable or predictable path. Market intervention may be
direct or indirect and serves to moderate the rate of change
(but not targeting). Rate may exhibit more or less volatility.

EXHIBIT 2.3 (3 OF 4)
IMF EXCHANGE RATE CLASSIFICATIONS

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Rate Classification 2009 de facto System Description and Requirements
Floating Free floating A floating rate is freely floating if intervention
Arrangements occurs only exceptionally, and confirmation of
intervention is limited to at most three
instances in a six-month period, each lasting no
more than three business days.
Residual Other managed This category is residual and is used when the
arrangements exchange rate does not meet the criteria for any
other category. Arrangements characterized by
frequent shifts in policies fall into this category.

EXHIBIT 2.3 (4 OF 4)
IMF EXCHANGE RATE CLASSIFICATIONS

Source: “Revised System for the Classification of Exchange Rate Arrangements,” by Karl Habermeier, Annamaria Kokenyne, Romain Veyrune, and Harald Anderson, IMF
Working Paper WP/09/211, International Monetary Fund, November 17, 2009. 17
IMF CLASSIFICATION OF CURRENCY REGIMES

 Exhibit 2.4 shows how

these major regime
categories translate in the
global market.

 The vertical dashed line,

the crawling peg, is the
zone some currencies
move into and out of
depending on their
relative currency stability.

For long description, see Appendix 3

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  As illustrated by Exhibit 2.5, the proportion of IMF member countries with floating

A GLOBAL ECLECTIC regimes has been increasing.

 Soft pegs declined dramatically in 2016.

 Although the contemporary international monetary system is typically referred to as a

“floating regime,” it is clearly not the case for the majority of the world’s nations.

EXHIBIT 2.5: IMF MEMBERSHIP EXCHANGE RATE REGIME CHOICES

For long description, Appendix 4

Source: Data drawn from Annual Report on Exchange Arrangements and Exchange Restrictions, International Monetary Fund,
Table 3, Exchange Rate Arrangements 2008–2019. 19
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FIXED VERSUS FLEXIBLE EXCHANGE RATES (1
OF 2)

 A nation’s choice as to which currency regime to follow

reflects national priorities about all facets of the economy,
including:
 inflation,
 unemployment,
 interest rate levels,
 trade balances, and
 economic growth.

 The choice between fixed and flexible rates may change

over time as priorities change.

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FIXED VERSUS FLEXIBLE EXCHANGE RATES (2
OF 2)

 Countries would prefer a fixed rate regime for the following reasons:
 stability in international prices
 inherent anti-inflationary nature of fixed prices

 However, a fixed rate regime has the following problems:

 Need for central banks to maintain large quantities of hard currencies and gold
to defend the fixed rate
 Fixed rates can be maintained at rates that are inconsistent with economic
fundamentals

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ATTRIBUTES OF THE “IDEAL” CURRENCY

 If the ideal currency existed, it would possess three attributes, often

referred to as the Impossible Trinity:
 Exchange rate stability
 Full financial integration
 Monetary independence

 The forces of economics do not allow the simultaneous achievement

of all three.

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EXHIBIT 2.6: THE IMPOSSIBLE TRINITY

• Exhibit 2.6 illustrates how pursuit of one

element of the trinity must result in
giving up one of the other elements.
• Nations must choose in which direction
to move from the center—toward points
A, B, or C. Their choice is a choice of
what to pursue and what to give up—that
of the opposite point of the pyramid.
Marginal compromise is possible, but
only marginal.

For long description, see Appendix 5

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A SINGLE CURRENCY FOR EUROPE: THE
EURO (1 OF 2)

 In December 1991, the members of the European

Union met at Maastricht, the Netherlands, to finalize
a treaty that changed Europe’s currency future.

 This treaty set out a timetable and a plan to replace

all individual ECU currencies with a single currency
called the euro.

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A SINGLE CURRENCY FOR EUROPE: THE
EURO (2 OF 2)

 To prepare for the EMU, a convergence criteria was

laid out whereby each member country was
responsible for managing the following to a specific
level:
 Nominal inflation rates
 Long-term interest rates
 Fiscal deficits
 Government debt

 In addition, a strong central bank, called the

European Central Bank (ECB), was established in
Frankfurt, Germany in 1998.

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THE LAUNCH OF THE EURO (1 OF 3)

 The euro affects markets in three ways:

 Cheaper transaction costs in the eurozone
 Currency risks and costs related to uncertainty are
reduced
 All consumers and businesses both inside and outside
the eurozone enjoy price transparency and increased
price-based competition

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THE LAUNCH OF THE EURO (2 OF 3)

 If the euro is to be successful, it must have a solid economic

foundation.

 The primary driver of a currency’s value is its ability to maintain its

purchasing power.

 The single largest threat to maintaining purchasing power is inflation,

so the job of the EU has been to prevent inflationary forces from
undermining the euro.

 Exhibit 2.7 shows how the euro has trended against the USD since
1999.

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EXHIBIT 2.7: THE U.S. DOLLAR-EUROPEAN EURO SPOT EXCHANGE RATE
Exhibit 2.7 shows how the euro has trended against the USD since 1999.

For long description, see Appendix 6

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THE LAUNCH OF THE EURO (3 OF 3)

 Exhibit 2.8 shows that all initial euro adopters (except UK and
Denmark) had pegged their currency to the ECU for the previous 20
years aided in the initial success of the euro.

 All members of the EU are expected eventually to replace their

currencies with the euro, but debate exists as to how far euro-
expansion can feasibly extend.

 The UK has always been outside the euro and The Brexit vote in June
2016 did not change that relationship.

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EXHIBIT 2.8: EXCHANGE
RATE REGIMES OF
EUROPEAN UNION
MEMBERS
Source: Based on data from the
European Union’s Convergence
Reports.

Notes: *ERM II participant; **Non-ERM

participant; ERM = Exchange Rate
Mechanism; ECU = European Currency
Unit; DM = Deutsche mark.

In June 2016 the United Kingdom voted

to leave the European Union.

For long description, see Appendix 7

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INTERNATIONALIZATION OF THE CHINESE RMB
Exhibit 2.9: Chinese Renminbi (CNY) to US Dollar (USD) Spot Rate (C N Y = 1.00 USD)

 Trading of the RMB is closely

controlled by the People’s Republic
of China and the People’s Bank of
China
 While carefully controlled, the RMB
has been allowed to revalue against
the U.S. dollar over time as shown
in Exhibit 2.9.
 The Chinese government has made
very clear, repeatedly, that it will not
allow either volatility or rapid and
rising interest rates to affect
domestic economic and business
conditions.

Source: David Eiteman, Arthur Stonehill, Michael Moffett, Multinational Business Finance, 14th edition, Pearson, 2015.

For long description, see Appendix 8 31

TWO-MARKET CURRENCY DEVELOPMENT
 China makes up roughly 15% of EXHIBIT 2.10: STRUCTURE OF THE CHINESE RENMINBI MARKET
the global economy.
 There is a continuing and
growing need for a more liquid
and accessible currency.
 The RMB continues to develop
along a segmented
onshore/offshore two-market
structure regulated by the PRC, as
seen in Exhibit 2.10.
 Nine different currencies are
traded daily against the RMB.
 As the world’s largest
commercial trader and second-
largest economy, it has been
considered inevitable that China’s
currency would become an
international currency.
Source: David Eiteman, Arthur Stonehill, Michael Moffett, Multinational Business Finance, 14th edition, Pearson, 2015.

For long description, see Appendix 9 32

THE TRIFFIN DILEMMA

 The Triffin Dilemma (named after economist Robert Triffin) is the potential conflict in objectives that may
arise between domestic monetary and currency policy objectives and external or international policy
objectives when a country’s currency is used as a reserve currency.

 Reserve Currency: A reserve currency is the currency that other countries hold in large amounts because
it’s considered stable and widely accepted for international trade. For example, the US Dollar is the
world’s main reserve currency.

 Dilemma: The country that issues the global reserve currency (like the US) has two competing goals:
 Supply enough currency to meet global demand so that international trade can happen smoothly.
 Keep the currency stable by managing its own economy well (avoiding large deficits and inflation).

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THE TRIFFIN DILEMMA
 The Conflict:
 A country must become internationally indebted to become a global reserve currency. To supply
enough currency to the world, the country needs to run trade deficits (import more than it exports)
and print more money. However, running large deficits and printing more money can weaken the
currency and create financial instability at home (like inflation or devaluation).
 On the other hand, if the country focuses on stability and avoids running deficits, it might not supply
enough currency to the rest of the world, slowing down global trade.

 Why is this a Problem?

 If the reserve currency becomes too weak (due to trade deficits), other countries may lose confidence
in it, causing problems for global trade and financial markets.
 But if the reserve currency country prioritizes stability, it might not supply enough money to the
world, leading to shortages in global trade financing.

 Example
 The United States faces this dilemma. To keep the US dollar as the global reserve currency, it needs to
maintain large amounts of dollars in global circulation (by running trade deficits). However, if these
deficits become too large, the value of the dollar might fall, hurting the US economy.

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EMERGING MARKETS AND REGIME CHOICES
(1 OF 2)

 A currency board exists when a country’s central bank commits to back

its monetary base—its money supply—entirely with foreign reserves at
all times.

 This means that a unit of domestic currency cannot be introduced into

the economy without an additional unit of foreign exchange reserves
being obtained first.
 Argentina moved from a managed exchange rate to a currency board in 1991
 In 2002, the country ended the currency board as a result of substantial
economic and political turmoil

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EMERGING MARKETS AND REGIME CHOICES (2
OF 2)

 Dollarization is the use of the U.S. dollar as the official currency of the
country.

 One attraction of dollarization is that sound monetary and exchange-

rate policies no longer depend on the intelligence and discipline of
domestic policymakers.
 Panama has used the dollar as its official currency since 1907
 Ecuador replaced its domestic currency with the U.S. dollar in September
2000

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CURRENCY REGIME CHOICES FOR EMERGING MARKETS
EXHIBIT 2.11:CURRENCY REGIME CHOICES FOR EMERGING MARKET NATIONS
Some experts suggest countries will be forced to extremes when choosing currency regimes—either a hard peg
or free-floating (Exhibit 2.11)

37
For long description, see Appendix 10
CURRENCY REGIME CHOICES FOR EMERGING MARKETS

Three common features

that make emerging
market choices difficult:

tendencies for
the emerging market’s
weak fiscal, financial, commerce to allow
vulnerability to sudden
and monetary currency substitution
stoppages of outside
institutions and the denomination of
capital flows
liabilities in dollars

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RESERVE CURRENCIES AND WHAT LIES AHEAD

 The Bretton Woods Agreement required more in the way of cooperation

 The present system is characterized by no rules, with varying degrees of cooperation

 Many believe that a new international monetary system could succeed only if it combined
cooperation among nations with individual discretion to pursue domestic social, economic,
and financial goals

39
Appendix

40
APPENDIX 1
Long Description for Exhibit 2.1

The diagram describes the various eras of the global monetary system as well as their impact on trade
and the economy. The timeline shows years from 1860 to 2020 in increments of 20 years. The
classical gold standard persisted between 1870s and 1914; the inter war years lasted from 1923 to
1938; the fixed exchange era began in 1944 and concluded in 1973; the floating exchange rates
started in 1973 and culminated in 1997; and the emerging era commenced in 1997 till 2020. Amid
these monetary system eras were the two world wars, between 1914 and 1919 and in the 1940s. A
table below the timeline shows the impact on trade and economies. The Impact on trade during the
various eras are: Classical gold standard, trade dominated capital flows; Inter war years, increased
barriers to trade and capital flows; Fixed exchange rates, capital flows begin to dominate trade;
Floating exchange rates, capital flows dominate trade; and Emerging era, selected emerging nations
open capital markets. The impact on economies during the various eras are: Classical gold standard,
increased world trade with limited capital flows; Inter war years, protectionism and nationalism; Fixed
exchange rates, expanded open economies; Floating exchange rates, industrial economies
increasingly open, emerging nations open slowly; and Emerging era, capital flows drive economic
development.
Return to presentation
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APPENDIX 2
Long Description for Exhibit 2.2

The x-axis shows the time period from 1964 to 2022 measured in increments of 2 years. The y-axis
shows the index value from 90 to 180 in increments of 10. The curve began from 140 in the year
1964, staying stable at the same level until 1971 marked as the end of the Bretton Woods period,
drops sharply to 125 with the dollar devaluation in 1973; peaks to 130 in 1976 due to the Jamaica
agreement, drops down in 1979 to 118 in the aftermath of the creation of the European Monetary
System, E M S, preceded a period of sustained rise of the index. The curve peaks in 1985 to a
level of 175 before dropping sharply again to a low of 115 during the Louvre Accords in 1987,
followed by the E M S crisis of 1992 plummeting the dollar drop below 110. After a brief period of
horizontal movement, the dollar rose again to 130 during the Asian crisis of 1997. Another spur to
its rise was the launch of the euro in 1999, at which point the index jumped to 140. However, the
drop came swiftly and the index plunged in the first decade of the twenty first century, falling below
100 in the aftermath of the financial crisis in 2008. A brief respite of a rise to 110 came in 2010,
despite which the euro peaked, getting valued at 1.6 dollars for each euro. Another drop in 2012
led to the index plunging to 90, but it recovered since then, strengthening to 120 in the aftermath of
the Brexit vote.
Return to presentation 42
APPENDIX 3
Long Description for Exhibit 2.4

The diagram shows how the major exchange rate regime categories translate in the
global market. The diagram begins with two options for exchange rates, fixed or floating.
If the rate is fixed or pegged to something, it can be either a hard peg or a soft peg.
Instances of hard pegs include currency boards and dollarization Soft pegs can be a
situation of fixed exchange rates where authorities maintain a set but variable band
about some other currency. Intermediate or crawling pegs are between fixed and floating
pegs. Floating pegs are market driven and they include managed float and free floating
currencies. Managed float means market forces of supply and demand set the exchange
rate, but with occasional government intervention. Free floating means market forces of
supply and demand are allowed to set the exchange rate with no government
intervention.

Return to presentation
43
APPENDIX 4

Long Description for Exhibit 2.5

The x-axis shows years from 2008 to 2019 in increments of 1 year. The y-axis shows the
percentage of I M F membership by regime choice from 0 to 50 in increments of 5. The
details are as follows: Hard peg: 2008, 12; 2009, 12; 2010 to 2019, 13. Soft Peg: 2008, 40;
2009, 35; 2010, 40; 2011, 43; 2012, 40; 2013, 43; 2014, 44; 2015, 47; 2016, 40; 2017, 42;
2018, 46; and 2019, 46. Floating: 2008, 40; 2009, 42; 2010, 36; 2011, 35; 2012, 35; 2013,
34; 2014, 34; 2015, 35; 2016, 37; 2017, 36; 2018, 34; and 2019, 34. Residual: 2008, 8;
2009, 11; 2010, 11; 2011, 9; 2012, 13; 2013, 10; 2014, 9; 2015, 5; 2016, 10; 2017, 9; 2018,
7; and 2019, 7.

Return to presentation

44
APPENDIX 5
Long Description for Exhibit 2.6

The diagram has a triangle at its center. The top represents Exchange Rate Stability: A
managed or pegged exchange rate; the left vertex is Monetary Independence: An independent
monetary policy; and the right vertex is Full Financial Integration: Free flow of capital. Nations
must choose in which direction to move from the center, toward points A, B, or C. This is
depicted as three arrows leading out from the center. Their choice is a choice of what to pursue
and what to give up, that of the opposite point of the pyramid. Marginal compromise is
possible, but only marginal. An instance on Point A on the left is China and major industrial
countries under Bretton Woods who gave up the free flow of capital. Point B on the right has
individual European Union Member States who gave up an independent monetary policy. Point
C at the bottom has United States and Japan who gave up a fixed exchange rate.

Return to presentation
45
APPENDIX 6
Long Description for Exhibit 2.7

The graph shows the U S Dollar European Euro spot exchange rate between January 1999 and February 2021.
The x-axis denotes the time period and the y-axis the dollar to euro exchange rate, which ranges from 0.80 to
1.60. The following list provides the fluctuations in the exchange rate, as represented by the graph. All values
are estimated. The rate began at 1.15 in January 1999. It then gradually dropped to below 0.9 from 2000 to
2002. After May 2002, the rate steadily rose to reach 1.25 in the early part of 2005. The rate crossed 1.37 in the
second half of 2005, before marginally dropping to 1.2 during May 2006. From this point on, the rate rose to
reach highs of nearly 1.6 in 2008. A drop to 1.3 in mid-2009 was temporary, and the rate rose once again to 1.5
in May 2010. The rate hovered between 1.2 and 1.45 for the next four years, rising to 1.4 in May 2014. At this
point, there was a gradual drop to reach 1.1 in 2015 and the exchange rate remained at these levels until 2016.
In January 2017, the rate dropped again to around 1.05, before rising to 1.25 in March 2018. The rate gradually
declined back to 1.10 in September 2020 before starting to rise again.

Return to presentation

46
APPENDIX 7 (1 OF 2)
Long Description for Exhibit 2.8

The diagram illustrates the exchange rate regimes of EU members. While 8 of the EU members had their currencies
pegged to the ECU or European Currency Unit since 1979, the remaining followed an orderly transition to adopting the
euro. The chart shows EU members outside ERM with a floating currency (free or pegged), outside ERM with a currency
pegged to DM or ECU or euro, with a currency pegged to DM or ECU or euro, and with the euro as the currency. The
details are as follows: Belgium, France, Germany, Ireland, Italy, Luxembourg, and Netherlands: Years with a currency
pegged to DM or ECU or Euro, 1979 to 1999; Years with Euro as currency, 1999 to 2017. Denmark: Years with a currency
pegged to DM or ECU or Euro, 1979 to 2017. United Kingdom: Years with a currency pegged to D M or ECU or Euro,
1990 to 1992. Years outside ERM with a floating currency, 1979 to 1987, 1988 to 1990, 1992 to 2017. Years outside ERM
with a currency pegged to DM or ECU or Euro, 1987 to 1988. Greece: Years outside ERM with a floating currency, 1981 to
1995. Years outside ERM with a currency pegged to DM or ECU or Euro, 1995 to 1997. Years with a currency pegged to D
M or ECU or Euro, 1997 to 2001. Years with Euro as currency, 2001 to 2017. Spain: Years outside ERM with a currency
pegged to DM or ECU or Euro, 1986 to 1989. Years with a currency pegged to DM or ECU or Euro, 1990 to 1999. Years
with Euro as currency, 1999 to 2017. Portugal: Years with a currency pegged to DM or ECU or Euro, 1986 to 1989. Years
outside ERM with a currency pegged to DM or ECU or Euro, 1990 to 1992. Years with a currency pegged to DM or ECU
or Euro, 1993 to 1999. Years with Euro as currency, 1999 to 2017. Austria: Years with a currency pegged to DM or ECU or
Euro, 1994 to 1999. Years with Euro as currency, 1999 to 2017. Finland: Years outside E R M with a floating currency,
1995 to 1996. Years with a currency pegged to DM or ECU or Euro, 1996 to 1999. Years with Euro as currency, 1999 to
2017. Sweden: Years outside ERM with a floating currency, 1995 to 2017.
47
APPENDIX 7 (2 OF 2)
Slovenia: Years outside ERM with a floating currency, 2004. Years with a currency pegged to DM or ECU or Euro, 2004
to 2007. Years with Euro as currency, 2007 to 2017. Cyprus: Years outside ERM with a currency pegged to DM or ECU
or Euro, 2004 to 2005. Years with a currency pegged to D M or ECU or Euro, 2005 to 2008. Years with Euro as currency,
2008 to 2017. Malta: Years outside ERM with a currency pegged to D M or ECU or Euro, 2004 to 2005. Years with a
currency pegged to DM or ECU or Euro, 2005 to 2008. Years with Euro as currency, 2008 to 2017. Slovakia: Years
outside ERM with a floating currency, 2004 to 2005. Years with a currency pegged to DM or E C U or Euro, 2005 to
2008. Years with Euro as currency, 2008 to 2017. Estonia: Years outside E R M with a currency pegged to D M or ECU
or Euro, 2004 to 2005. Years with a currency pegged to D M or ECU or Euro, 2005 to 2011. Years with Euro as currency,
2011 to 2017. Latvia: Years outside ERM with a floating currency, 2004 to 2005. Years outside ERM with a currency
pegged to D M or ECU or Euro, 2005 to 2006. Years with a currency pegged to DM or ECU or Euro, 2006 to 2014. Years
with Euro as currency, 2014 to 2017. Lithuania: Years outside ERM with a currency pegged to ECU or Euro, 2004 to
2005. Years with a currency pegged to DM or ECU or Euro, 2005 to 2015. Years with Euro as currency, 2015 to 2017.
Hungary: Years outside ERM with a currency pegged to D M or ECU or Euro, 2004 to 2008. Years outside E R M with a
floating currency, 2008 to 2017. Poland: Years outside ERM with a floating currency, 2004 to 2017. Czech Republic:
Years outside ERM with a floating currency, 2004 to 2017. Bulgaria: Years outside ERM with a currency pegged to ECU
or Euro, 2007 to 2017. Romania: Years outside ERM with a floating currency, 2007 to 2017. Croatia: Years outside ERM
with a floating currency, 2013 to 2017.

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APPENDIX 8
Long Description for Exhibit 2.9

The x-axis shows the time period from January 2004 to February 2021 measured in multiples of every five
months. The y-axis shows the spot rate from 6.00 to 8.50 in increments of 0.50. The chart high begins in
January 2004 with CNY 8.278 to 1 USD. The rate dropped below 7 in 2008 after the People’s Bank of
China announced it was abandoning the USD on July 21, 2005. The rate remained stable for two years
before falling again to near 6 in January 2014. The was the continuation of a managed floating exchange
rate regime with a gradual revaluation of the CNY to the USD. Rates began to rise with a surprise
devaluation in August 2015. Rate was near 7 in December 2016 when foreign institutions are granted
access to Chinese interbank FX market. The International Monetary Fund adds yuan to the SDR in 2016.
The rate plunges again between March and August 2018 before rising again through September 2020.
The yuan returns to revaluation path again the USD with a sharp decline from September 2020 through
February 2021.

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APPENDIX 9

Long Description for Exhibit 2.10

The diagram shows the backflow of the Hong Kong Offshore Market (CNH) to the China Onshore Market (CNY).
Hong Kong-based banks have preferred access to RMB for trade financing. The Hong Kong Offshore Market has
three elements. Corporate bond issues in RMB growing, the Panda Bond or Dim Sum Market; RMB Qualified
Foreign Institutional Investors gaining greater access to onshore financial deposits; Expansion of offshore market
to Singapore, Macau, and Taiwan, with trading hubs in major international financial centers including London.
Exchange of RMB in and out of the onshore market continues to be heavily controlled and restricted. RMB-
denominated trade remains quite low, with the U.S. dollar still dominating both import and export currency of
denomination.

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 APPENDIX 10
Long Description for Exhibit 2.11

The diagram highlights the various options of currency regime choices for emerging market nations. High
capital mobility is forcing emerging market nations to choose between the two extremes of free floating and
fixed rate or currency board. Free floating currencies have the following features: Currency value is free to
float up and down with international market forces; Independent monetary policy; Free movement of capital
allowed, but at the loss of stability, and with the possibility of sudden massive capital outflows; and
Increased volatility may be more than what a small country with a small financial market can withstand.
Fixed currencies have the following features: Fixed rate regime requires all exchange at the government’s
set rate of exchange; Currency board fixes the value of local currency to another currency or basket;
Independent monetary policy is lost; Political influence on monetary policy is eliminated; and Seignorage,
the benefits accruing to a government from the ability to print its own money, is lost.

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End of Module
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