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1、Multinational Financial Management Alan Shapiro 7th EditionJ.Wiley&SonsPower Points byJoseph F.Greco,Ph.D.California State University,Fullerton1CHAPTER 3THE INTERNATIONAL MONETARY SYSTEM2CHAPTER OVERVIEWI.ALTERNATIVE EXCHANGE RATE SYSTEMSII.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYTEMIII.THE
2、EUROPEAN MONETARY SYSTEM AND MONETARY UNIONIV.EMERGING MARKET CURRENCY CRISES3PART I.ALTERNATIVE EXCHANGE RATE SYSTEMSI.FIVE MARKET MECHANISMSA.Freely Floating (“Clean Float”)1.Market forces of supply and demand determine rates.4ALTERNATIVE EXCHANGE RATE SYSTEMS2.Forces influenced bya.price levelsb.
3、interest ratesc.economic growth3.Rates fluctuate randomly over time.5ALTERNATIVE EXCHANGE RATE SYSTEMSB.Managed Float(“Dirty Float”)1.Market forces set rates unless excess volatility occurs.2.Then,central bank determines rate.6ALTERNATIVE EXCHANGE RATE SYSTEMSC.Target-Zone Arrangement1.Rate Determin
4、ationa.Market forces constrainedto upper and lower range of rates.b.Members to the arrangementadjust their national economic policies to maintain target.7ALTERNATIVE EXCHANGE RATE SYSTEMSD.Fixed Rate System1.Rate determinationa.Government maintains target rates.b.If rates threatened,central banks bu
5、y/sell currency.c.Monetary policies coordinated.8ALTERNATIVE EXCHANGE RATE SYSTEMSE.Current System1.A hybrid systema.Major currencies:use freely-floating methodb.Other currencies move in and out of various fixed-rate systems.9PART II.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMI.THE USE OF G
6、OLDA.Desirable propertiesB.In short run:High production costs limit changes.C.In long run:Commodity money insures stability.10A BRIEF HISTORYII.The Classical Gold Standard(1821-1914)A.Major global currencies on gold standard.1.Nations fix the exchange rate in terms of a specific amount of gold.11A B
7、RIEF HISTORY2.Maintenance involved the buying and selling of gold at that price.3.Disturbances in Price Levels:Would be offset by the price-specie*-flow mechanism.*specie=gold coins12A BRIEF HISTORYa.Price-specie-flow mechanismadjustments were automatic:1.)When a balance of payments surplus led to a
8、 gold inflow;2.)Gold inflow led to higher prices which reduced surplus;3.)Gold outflow led to lower prices and increased surplus.13A BRIEF HISTORYIII.The Gold Exchange Standard(1925-1931)A.Only U.S.and Britain allowedto hold gold reserves.B.Others could hold both gold,dollars or pound reserves.14A B
9、RIEF HISTORYC.Currencies devalued in 1931-led to trade wars.D.Bretton Woods Conference-called in order to avoid future protectionist and destructive economic policies15A BRIEF HISTORYV.The Bretton Woods System(1946-1971)1.U.S.$was key currency;valued at$1-1/35 oz.of gold.2.All currencies linked to t
10、hat price in a fixed rate system.16A BRIEF HISTORY3.Exchange rates allowed to fluctuate by 1%above or below initially set rates.B.Collapse,19711.Causes:a.U.S.high inflation rate b.U.S.$depreciated sharply.17A BRIEF HISTORYV.Post-Bretton Woods System(1971-Present)A.Smithsonian Agreement,1971:US$deval
11、ued to 1/38 oz.of gold.By 1973:World on a freely floating exchange rate system.18A BRIEF HISTORYB.OPEC and the Oil Crisis(1973-774)1.OPEC raised oil prices four fold;2.Exchange rate turmoil resulted;3.Caused OPEC nations to earn large surplus B-O-P.19A BRIEF HISTORY4.Surpluses recycled to debtor nat
12、ions which set up debt crisis of 1980s.C.Dollar Crisis(1977-78)1.U.S.B-O-P difficulties2.Result of inconsistent monetary policy in U.S.20A BRIEF HISTORY3.Dollar value falls as confidence shrinks.D.The Rising Dollar(1980-85)1.U.S.inflation subsides as theFed raises interest rates2.Rising rates attrac
13、ts global capital to U.S.21A BRIEF HISTORY3.Result:Dollar value rises.E.The Sinking Dollar:(1985-87)1.Dollar revaluated slowly downward;2.Plaza Agreement(1985)G-5 agree to depress US$further.22A BRIEF HISTORY3.Louvre Agreement(1987)G-7 agree to support the falling US$.F.Recent History(1988-Present)1
14、.1988 US$stabilized2.Post-1991 Confidence resulted in stronger dollar3.1993-1995 Dollar value falls23PART III.THE EUROPEAN MONETARY SYSTEMI.INTRODUCTIONA.The European Monetary System(EMS)1.A target-zone method(1979)2.Close macroeconomic policy coordination required.24THE EUROPEAN MONETARY SYSTEMB.EM
15、S Objective:to provide exchange rate stability to all members by holding exchange rates within specified limits.25THE EUROPEAN MONETARY SYSTEMC.European Currency Unit(ECU)a“cocktail”of European currencies with specified weights as the unit of account.26THE EUROPEAN MONETARY SYSTEM1.Exchange rate mec
16、hanism(ERM)-each member determines mutually agreed upon central cross rate for its currency.27THE EUROPEAN MONETARY SYSTEM2.Member Pledge:to keep within 15%margin above or below the central rate.28THE EUROPEAN MONETARY SYSTEMD.EMS ups and downs1.Foreign exchange interventions:failed due to lack of s
17、upport by coordinated monetary policies.29THE EUROPEAN MONETARY SYSTEM2.Currency Crisis of Sept.1992a.System broke downb.Britain and Italy forced towithdraw from EMS.30THE EUROPEAN MONETARY SYSTEMG.Failure of the EMS:members allowed political priorities to dominate exchange rate policies.31THE EUROP
18、EAN MONETARY SYSTEMH.Maastricht Treaty1.Called for Monetary Union by 1999(moved to 2002)2.Established a single currency:the euro32THE EUROPEAN MONETARY SYSTEM3.Calls for creation of a singlecentral EU bank4.Adopts tough fiscal standards33THE EUROPEAN MONETARY SYSTEMI.Costs/Benefits of A Single Curre
19、ncyA.Benefits1.Reduces cost of doing business2.Reduces exchange rate risk 34THE EUROPEAN MONETARY SYSTEMB.Costs1.Lack of national monetary flexibility.35PART IV.EMERGING MARKET CURRENCY CRISESI.Transmission MechanismsA.Trade linkscontagion spreads through tradeB.Financial System-more important trans
20、mission mechanism-investors sell off to make up for losses 36EMERGING MARKET CURRENCY CRISESII.Origins of Emerging Market CrisesIII.A.Moral hazardIV.V.B.Fundamental Policy Conflict37EMERGING MARKET CURRENCY CRISESIII.Policy Proposals for Dealing with Emerging Market CrisesIV.A.Currency ControlsV.B.Freely Floating CurrencyVI.C.Permanently Fixed Exchange Rate38