The Evolu2on of the Interna2onal Monetary System. Prof. George Alogoskoufis Fletcher School, University

Transcription

1 The Evolu2on of the Interna2onal Monetary System Prof. George Alogoskoufis Fletcher School, University

2 Interdependent Economies Our analysis up to now related to single open economies, which took developments in the rest of the world as given. However, large economies are interdependent, in the sense that developments and policies in one country affect macroeconomics developments in both the country itself, and other countries. Thus, developments and policies in large economies affect the path of the global economy. How policies in one economy affect another depends on the characteris2cs of the interna2onal monetary system, the exchange rate regime, the nature of conver2bility, interna2onal currencies and capital controls. In this lecture we shall examine the evolu2on and the characteris2cs of the interna2onal monetary system. 2

3 Bimetallism A fixed exchange rate system, based on silver and gold. Value of gold to silver 15 ½ to 1. The Banque de France stood ready to buy and sell silver and gold in a ra2o of 1 to 15 ½. England from 1821 on a gold standard because it had a lower price of silver, the US on a silver standard because it had a higher price of silver. Correc2on of imbalances through flows of precious metals 3

4 The Interna2onal Gold Standard, A fixed exchange rate system, based on gold and the pound sterling. The Bank of England at the heart of the system. Banknotes were circula2ng but there was full conver2bility to gold everywhere. Three systems of monetary coverage: credit, propor2onal and mixed. Correc2ng external imbalances through gold and currency flows and changes in interest rates. 4

5 The Rules of the Game For the gold standard to func2on properly, everyone was required to respect the "rules of the game. These were: 1. Not to intervene and prevent the flow of gold and foreign exchange, 2. Not to change the metallic coverage rates of their currencies. The interna2onal gold standard collapsed with the outbreak of World War I, as conver2bility was abandoned by Britain and other countries involved in the war. 5

6 The Interwar Years, Floa2ng exchange rates and monetary instability Acempts to restore the gold-exchange standard between 1924 and 1926 Collapse of the gold-exchange standard in 1931 the great crisis of 1929 Since 1933 devalua2on of the dollar against gold Un2l the Second World War floa2ng rates, foreign exchange restric2ons, protec2onism. 6

7 The Brecon Woods System, Fixed but adjustable exchange rates All countries defined a fixed exchange rate against the US dollar and the US defined a fixed gold price, at $35 an ounce. Was essen2ally a gold-dollar standard. Countries could borrow from the IMF in order to finance current account deficits. Possibility of devalua2on in cases of fundamental disequilibrium. Limited conver2bility into gold or foreign currency. Essen2ally conver2bility applied only between central banks, although gradually foreign exchange restric2ons were li@ed. 7

8 Floa2ng Exchange Rates: Freely floa2ng exchange rates among the major currencies This does not imply automa2c restora2on of external equilibrium Since the early 1980s interna2onal infla2on was tackled, although at first infla2on shot up. The system is more symmetrical, although the dollar remains the dominant reserve currency Loose coordina2on of macroeconomic policies (G-8, G-20) 8

9 The Dollar Euro Exchange Rate Nominal $/ Real $/ 9

10 The Yen Dollar Exchange Rate Real /$ Nominal /$ 10

11 Short Term Interest Rates Euro Area USA 11

12 Infla2on in the USA and Germany % 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% % USA Germany 12

13 Unemployment in the USA and Germany USA Germany 13