The International
Monetary System
Evolution of the
International Monetary System
• Bimetallism: Before 1875
• Classical Gold Standard: 1875-1914
• WWI
• Inter-war failures
• Post-war policy
•Bretton Woods and the dollar
standard
Price-Specie-Flow
Home
Foreign
Net Flow of Goods and
Services
The ABCs of International Financial
Institutions
INTERNATIONAL FINANCIAL INSTITUTIONS
IMF International Monetary Fund
IBRD International Bank for Reconstruction & Development 1944
IFC International Finance Corporation
IDA International Development Association
IDB Inter-American Development Bank
AFDB African Development Bank
ADB Asian Development Bank
EBRD European Bank for Reconstruction & Development
BIS Bank for International Settlements
OECD Org. for Economic Cooperation & Development 1961
UNDP United National Development Program
EDF European Development Fund
1944
1956
1961
1960
1964
1966
1991
1930
1945
1975
International Monetary Fund
CAD
DEM
.9250
GBP
2.40
JPY
.0028
Par
OTHERS
.2732
US
DOLLAR
$35 = 1 oz.
GOLD
FRF
.1800
.0016
ITL
Movements in Parities of Currencies of
Selected Industrial Countries
120
USD, CHF, JPY
100
DEM
BEF
80
NLG
DKK
60
GBP
ITL
40
FRF
20
0
1947
1950
1955
1960
1965
1970
Conditionality
• Explicit commitment that members make to implement
remedial measures in return for the IMF's support.
• Requires:
– Structural adjustment
– Government spending & revenue
• debts and deficits
• military expenditures
– Pricing system
• exchange & interest rates, wages, commodity prices
– Medium-term, credible
– Periodic monitoring
Post-Bretton Woods
Exchange Rate Trends
Washington Consensus
• Fiscal discipline
• A redirection of public expenditure priorities to improving income
distribution, such as primary health care, primary education, and
infrastructure
• Tax reform (to lower marginal rates and broaden the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization – export promotion policies
• Liberalization of inflows of foreign direct investment
• Privatization
• Deregulation (to abolish barriers to entry and exit)
• Secure property rights
Williamson, John, ed. 1990. Latin American Adjustment: How Much Has It Happened? Washington, D.C.: Institute
for International Economics.
The Balance
of Payments
HOME
GOODS
AND
SERVICE
SERVICES
S
FOREIGN
Gains from trade
GOODS
AND
SERVICES
Inter-temporal trade
FDI
ASSETS
(Currency)
ASSETS
(Currency)
Portfolio diversification
Balance of Payments Accounting
• The Balance of Payments is the statistical
record of a country’s international
transactions over a certain period of time
presented in the form of double-entry
bookkeeping.
Balance of Payments
• Current Account
– measure of the value of imports and exports of
goods and services
• Capital Account
– measure of the value of international
purchases and sales of assets
– money, stocks, bonds, land, factories
Balance of Payments Identity
BCA + BKA + BRA = 0
Where:
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
Under a pure flexible exchange rate regime,
BCA + BKA = 0
Balance of Payments
• Credit
– any transaction resulting in a receipt to a domestic
resident from a foreign resident
• Debit
– any transaction resulting in a payment to a foreign
resident from a domestic resident
U.S. Balance of Payments Data 2006
Credits
Debits
Current Account
1
Exports
2
Imports
3
Unilateral Transfers
Balance on Current Account
Capital Account
4
5
6
7
Direct Investment
Portfolio Investment
Other Investments
Balance on Capital Account
Statistical Discrepancies
Overall Balance
Official Reserve Account
$2,096.3
($2,818.0)
$24.4
($114.0)
($811.3)
$180.6
$1,017.4
$690.4
$826.9
($18)
($235.4)
($426.1)
($400)
($2.4)
$2.4
US Balance of Payments (billions $)
CURRENT ACCOUNT
1) Exports
Merchandise
Services
Income receipts
2) Imports
Merchandise
Services
Income Payments
3) Net Unilateral Transfers
CREDITS
DEBITS
+1414.9
+773.3
+296.2
+345.4
-1797.1
-1,222.8
-215.2
-359.1
-53.2
Balance on Current Account (1+2+3)
-435.4
CAPITAL ACCOUNT
4) US Assets Held Abroad (increase = negative sign)
Official reserve assets
Other private assets
-523.3
-0.3
-523.0
5) Foreign Assets Held in the US (increase = positive sign) +953.1
Official reserve assets
+35.9
Other private assets
Balance on Financial Account (4+5)
+429.8
Statistical Discrepancy - (1+2+3+4+5)
+5.6
+917.2
US Official Settlements Balance (billions $)
CREDITS
CURRENT ACCOUNT
1) Exports
2) Imports
3) Net Unilateral Transfers
4) Balance on Current Account (1+2+3)
DEBITS
+1,414.9
-1,797.1
-53.2
-435.4
CAPITAL ACCOUNT
Non-reserve Financial Account
5) Private US Assets Held Abroad (increase - )
6) Private Foreign Assets Held in US (increase + )
7) Balance on Non-reserve Financial Account (5+6)
8) Statistical Discrepancy
9) Official Settlements Balance (4+7+8)
-523.0
+917.2
+394.2
+5.6
-35.6
Official Reserve Transactions
10) US Official Assets Held Abroad (increase - )
Gold, SDRs, IMF reserves, Foreign currencies
11) Foreign Official Assets Held in US (increase + )
-0.3
+35.9
US govt securities and liabilities
12) Balance of Official Reserve Transactions (10+11)
+35.6
Balance of Payments Trends in Major
Countries 1982-2006
Balance of Payments
1000
China BCA
China BKA
500
0
1982
Japan BCA
Japan BKA
Germany BCA
1987
1992
1997
-500
2002
2007
Germany BKA
UK BCA
UK BKA
-1000
U.S. BCA
Year
Source: IMF International Financial Statistics
Yearbook, various issues
U.S. BKA