In this chapter, students will be able to understand: Describe the historical development of the modern global monetary system, explain the role played by the World Bank and the IMF in the international monetary system, compare and contrast the differences between a fixed and a floating exchange rate system. | Global Business Today 6e by Charles . Hill McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 The International Monetary System Introduction Question: What is the international monetary system? The international monetary system refers to the institutional arrangements that govern exchange rates A floating exchange rate system exists in countries where the foreign exchange market determines the relative value of a currency Introduction A pegged exchange rate system exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate A dirty float exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency With a fixed exchange rate system countries fix their currencies against each other at a mutually agreed upon value The Gold Standard Question: What is the Gold Standard? The gold standard refers to the practice of pegging currencies to gold and guaranteeing convertibility The exchange rate between currencies was based on the gold par value (the amount of a currency needed to purchase one ounce of gold) The key strength of the gold standard was its powerful mechanism for simultaneously achieving balance-of-trade equilibrium by all countries The Gold Standard The gold standard worked fairly well from the 1870s until the start of World War I After the war, in an effort to encourage exports and domestic employment, countries started regularly devaluing their currencies Confidence in the system fell, and people began to demand gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility The Gold Standard ended in 1939 The Bretton Woods System A new international monetary system was designed in 1944 in Bretton Woods, New . | Global Business Today 6e by Charles . Hill McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 The International Monetary System Introduction Question: What is the international monetary system? The international monetary system refers to the institutional arrangements that govern exchange rates A floating exchange rate system exists in countries where the foreign exchange market determines the relative value of a currency Introduction A pegged exchange rate system exists when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate A dirty float exists when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency With a fixed exchange rate system countries fix their currencies against each other at a mutually
