Chap 10

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The International Monetary System

Chapter Outline

Opening Case: Argentina’s Monetary Crisis

Introduction

The Gold Standard

Mechanics of the Gold Standard
Strength of the Gold Standard
The Period between the Wars, 1918-1939

The Bretton Woods System

The Role of the IMF
The Role of the World Bank

The Collapse of the Fixed Exchange Rate System

The Floating Exchange Rate Regime

The Jamaica Agreement
Exchange Rates Since 1973
Country Focus: The U.S. Dollar, Oil Prices, and Recycling Petrodollars

Fixed Versus Floating Exchange Rates

The Case for Floating Exchange Rates
The Case for Fixed Exchange Rates
Who is Right?

Exchange Rate Regimes in Practice

Pegged Exchange Rates
Currency Boards

CRISIS MANAGEMENT BY the imf

Financial Crisis in the Post-Bretton Woods Era
Mexican Currency Crisis of 1995
The Asian Crisis
Evaluating the IMF’s Policy Prescriptions
Country Focus: Turkey and the IMF

FOCUS ON mANAGERIAL IMPLICATIONS

Currency Management
Business Strategy
Management Focus: Airbus and the Euro
Corporate - Government Relations

SUMMARY

Critical THINKING AND Discussion Questions

CLOSING CASE: China’s Managed Float

Learning Objectives

1. Be familiar with the historical development of the modern global monetary system.

2. Discuss the role played by the World Bank and the IMF in the international monetary system.

3. Be familiar with the differences between a fixed and floating exchange rate system.

4. Know what exchange rate regimes are used in the world today, and why countries adopt different exchange rate regimes.

5. Understand the debate surrounding the role of the IMF in the management of financial crises.

6. Appreciate the implications of the global monetary system for currency management and business strategy.

Chapter Summary

The objective of this chapter is to explain how the international monetary system works and its implications for international business. The chapter begins by reviewing the historical evolution of the monetary system, starting with the gold standard and the Bretton Woods System. The chapter explains the role of the International Monetary Fund (IMF) and the World Bank, both of which were initiated by the Bretton Woods Conference. The fixed exchange rate system that was initiated by the Bretton Woods Conference collapsed in 1973. The majority of the chapter explains the workings of the current international monetary system. The pluses and minuses of fixed exchange rates versus floating exchange rates are discussed. Scholars differ in regard to which system is best. The current role of the IMF and the World Bank are discussed, including the manner in which the IMF has helped nations restructure their debts.

Opening Case: Argentina’s Monetary Crisis

Summary

The opening case examines Argentina’s currency crisis. In the 1990s, Argentina maintained a fixed exchange rate pegging its currency to the U.S. dollar at the rate of $1 = 1 peso. By 2001, it became increasingly difficult to maintain this fixed exchange rate. Brazil had devalued its currency against the dollar, and thus against Argentina’s peso. As a result, Argentina’s exports were no longer competitive. Making the situation even more difficult was the rise in the dollar against most major currencies, and the concurrent rise of the Argentine peso. A crisis of confidence ensued prompting many investors to pull out of the country. Unemployment soared, and the government was forced to negotiate a loan from the International Monetary Fund. Discussion of the case can revolve around the following questions:

Suggested Discussion Questions

QUESTION 1: Explain how the value of the peso was affected by changes in the currencies of both Brazil and the United States. How did Argentina’s pegged exchange...
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