The International Financial System

Giddy

Exchange Rate Systems and Policies/1

The International Financial System

Prof. Ian Giddy New York University

Global Financial Architecture

l Institutions l Issues l Exchange-rate system

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 2

Giddy

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Global Financial Architecture

l Institutions l Issues

Govern ments

l Exchange-rate system

World Bank

Govern ments

Central Banks

International Monetary Fund

Investors

Copyright ?2002 Ian H. Giddy

Banks

Financial Markets

Businesses Exchange Rate Systems and Policies 3

Alternative Bank-Industry Linkages

The EquityMarket System

Banks

The BankBased System

The BankIndustrial Crossholding System

Banks / Investment Vehicles

Investment Vehicles & Insurance

Banks

The Statecentered System

Banks / Investment Vehicles

Industrial Companies

Copyright ?2002 Ian H. Giddy

Individuals Industrial Companies

Individuals Industrial Companies

Individuals

Industrial Companies Individuals

State Institutions

Investment Vehicles

Investment Vehicles & Insurance Industrial Companies

Investment Vehicles & Insurance Industrial Companies

Exchange Rate Systems and Policies 4

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Global Financial Architecture

l Institutions l Issues l 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 Institutions l Issues l Exchange-rate system

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 6

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Exchange-Rate Systems

l Some history l What is "the international monetary system"

today? l Fixed versus floating exchange rates l The balance of payments and the adjustment

process l The European Monetary System

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 7

History of the World

l Gold, inflation and exchange rates: the first 100 years

l War, depression and competitive devaluation l Bretton Woods l 1971 and floating rates l Currency blocs?

Copyright ?2002 Ian H. Giddy

Exchange Rate Systems and Policies 8

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To Fix or To Float, That is the Question

Floating

Economic circumstances,

and Economic

policies

Fixed

Copyright ?2002 Ian H. Giddy

Independent free float Managed float

Frequent devaluations or revaluations Crawing peg

Tied by formula to inflation index

Basket peg

Pegged to one currency Absolutely fixed to one

currency

Exchange Rate Systems and Policies 9

The Balance of Payments

Transylvania's Balance of Payments

Exports ( goods sold to foreigners)

Debits

Imports (goods bought from

-16

foreigners)

Services, like tourism (and

-2

interest paid/received

Aid (a "plug")

1

Cred its 11

3

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

3 -2 3

-1 -21.00

21.00

Trade Balance

-5 Current Account Balance

-3 Overall Balance

-2

Exchange Rate Systems and Policies 10

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