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Lecture International economics: Chapter 14 - Hendrik Van den Berg

Chapter 14 - The evolution of the international financial system. After completing this chapter, students will be able to: Present the history of the international financial system that existed before today’s mixture of floating, fixed, and manipulated exchange rates; use the historical examples to illustrate how the trilemma was dealt with and how well each system promoted human welfare;. | The Evolution of the International Financial System Experience is the name we give to past mistakes, reform that which we give to future ones. (Henry Wallach, 1972) The Goals of This Chapter Present the history of the international financial system that existed before today’s mixture of floating, fixed, and manipulated exchange rates. Use the historical examples to illustrate how the trilemma was dealt with and how well each system promoted human welfare. Show why financial orders tend to change when changing economic, social, and political conditions cause policy makers to address the trilemma differently. Enable students to better judge the pro’s and con’s of the different financial orders. Time Line of International Financial Orders The Rules of the Game The set of rules and other formal and informal incentives under which a financial system operates is called an order. An international monetary order is sometimes referred to in the international finance literature as “the rules of the game,” a term reportedly coined by John Maynard Keynes. A monetary order is to a monetary system somewhat like a constitution is to a political system. Judging Past International Financial Systems 1. How fast did economies grow and raise standards of living? 2. How fast did international trade and investment expand? 3. How compatible was the order with sound monetary policies and price stability? 4. How well were outside economic shocks dissipated and negative consequences to employment and inflation avoided? 5. How much flexibility did individual countries have in setting policies aimed at specific national economic objectives? 6. How were the benefits and costs of operating under the order spread across the different countries that adhered to the system? 7. Was the system was largely self-regulating or did it require costly institutional guidance and frequent policy adjustments by individual countries? Report Card The textbook evaluates each international financial order . | The Evolution of the International Financial System Experience is the name we give to past mistakes, reform that which we give to future ones. (Henry Wallach, 1972) The Goals of This Chapter Present the history of the international financial system that existed before today’s mixture of floating, fixed, and manipulated exchange rates. Use the historical examples to illustrate how the trilemma was dealt with and how well each system promoted human welfare. Show why financial orders tend to change when changing economic, social, and political conditions cause policy makers to address the trilemma differently. Enable students to better judge the pro’s and con’s of the different financial orders. Time Line of International Financial Orders The Rules of the Game The set of rules and other formal and informal incentives under which a financial system operates is called an order. An international monetary order is sometimes referred to in the international finance literature as “the rules of