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Lecture-12 International Financial System

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27 views12 pages

Lecture-12 International Financial System

Uploaded by

mxdxcr2229
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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International financial System

Content

 What is International financial System?


 Evolution of International Financial System
 Intervention in Foreign exchange Market
 Role of International Monetary Fund (IMF)
 International Consideration and Monetary Policy .
What is International financial System?

 The international financial system is the financial system consisting of


institutions and regulators that act on the international level, as opposed to those
that act on national or regional level.

 The main players are the international or global institutions, such as world bank,
International finance corporation , national agencies and government departments
.e.g. Central banks and finance ministries , and private institutions acting on the
global scale, e.g. banks and hedge funds.
 Moreover, international financial institutions (IFI) , are financial institutions that
have been established ( or chartered) by more than one country , and hence are
subjects of international law.

 Their owners or shareholders are generally national governments , although other


international institutions and other organizations occasionally figure as
shareholders.

 The best-known IFIs are the world bank , the IMF , and the regional development
banks.
 Some of the IFIs are considered UN agencies.
Evolution of International Financial System

1. Gold Standard : Before World War 1 , the world economy operated under the
gold standard , meaning that currency of most countries was convertible into
gold.

2. Bretton Woods System:


The Bretton Woods agreement created the international monetary fund(IMF) in
1945 , and U.S dollar became the international monetary standard.
3. Fixed exchange rate:
 Under this system , the central bank intervenes to adjust fluctuations and to
maintain stable fixed exchange rate.

4. Managed Float:
 Exchange rates are allowed to change daily in response to market forces.
Intervention in the Foreign Exchange Market

 The first step in understanding how central bank intervention in foreign exchange
market affects exchange rates is to see the impact on the monetary base from a
central bank sale in the foreign exchange market of some of its holdings of assets
denominated in a foreign currency (called international reserves).

 A central bank’s purchase of domestic currency and corresponding sale of foreign


assets in the foreign exchange market leads to an equal decline In its international
reserves and the monetary base.
 On the other side, a central bank’s sale of domestic currency to purchase foreign
assets in the foreign exchange market results in an equal rise in its international
reserves and the monetary base.
Role of International Monetary Fund(IMF)

 The international monetary fund was originally set up under the Bretton Woods
system to help countries deal with balance of payments problems and stay with
fixed exchange rate by lending to deficit countries.

 With the collapse of the Bretton Woods system of fixed exchange rates in 1971,
the IMF has taken on new role.

 The IMF continues to function as a data collector and provide technical


assistance to its member countries.
 Also it plays the role of international lender of last resort in cases of financial crisis.
International Considerations and Monetary Policy

 When central bank intervenes in the foreign exchange market , they acquire or
sell off international reserves , and their monetary base is affected.

 When a central bank intervenes in the foreign exchange market , it gives up some
control of its money supply.
 As such there are three international considerations affect the conduct of
monetary policy:
1. Direct effects of the foreign exchange market on the monetary policy
2. Balance of payment considerations , and
3. Exchange rate consideration.

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