Chapter 11 ‒ The International Monetary System
11-1
The International Monetary System
Learning objectives
differences between a fixed and a
floating exchange rate system.
countries adopt different
exchange rate regimes.
This chapter discusses the evolution of the
international monetary system and the
The role of the IMF is to maintain order in the
international monetary system to avoid a
the 1930s, and to control price inflation by
imposing monetary discipline on countries.
exchange rate regime. China moved from its
pegged system to a managed float in 2005.
Since then its currency has appreciated against
most other currencies.
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Chapter 11 ‒ The International Monetary System
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OUTLINE OF CHAPTER 11: THE INTERNATIONAL MONETARY
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
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
Evaluating the IMF’s Policy Prescriptions
Focus on Managerial Implications
Currency Management
Business Strategy
Management Focus: Airbus and the Euro
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McGraw-Hill Education.
Closing Case: China’s Exchange Rate Regime
Chapter 11 ‒ The International Monetary System
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
CLASSROOM DISCUSSION POINT
Ask students how much their currency is worth. Try to get them to identify its value in
terms of another currency. Then ask students how they might know the value of the
currency. Students will probably indicate options like the posting at the currency kiosk at
the airport, or the rates that are printed in the newspaper or are available online.
Dig a little deeper and try to get students to identify some of the factors that could
influence the value of a currency.
Next, ask students what happens to currency values each day, and why. Try to get
students to recognize the idea of a floating exchange rate system.
Finally, link this discussion to the evolution of the current international monetary system.
OPENING CASE: Egypt and the IMF
Summary
The opening case explores the economic crisis in Egypt that ultimately forced the country
to request a loan from the IMF. Egypt’s president, Abdel Fatah al-Sissi, came to power in
2013 amid growing economic problems, one of which was a growing shortage of foreign
currency necessary to buy basic commodities. By 2016, the situation had reached a crisis
point and Egypt appealed to the IMF for a loan. The IMF complied with the request, but
in return demanded that Egypt adopt a series of austerity measures designed to get the
country’s economy back on track. Discussion of the case can begin with the following
questions.
QUESTION 1: What is the role of the IMF in the global economy? Why was it important
for the IMF to step in to help Egypt?
ANSWER 1: The primary role of the IMF in the modern era is to provide financial
QUESTION 2: How did the IMF help Egypt? What impact did it have on the country’s
economy and prospects for future growth?
Chapter 11 ‒ The International Monetary System
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intended to encourage exports and reduce the country’s trade deficit. The goal was to
help Egypt earn more foreign currency to pay for items the country needed.
QUESTION 3: Discuss the IMF’s approach to shore up Egypt’s economy via austerity
measures. What are the expected effects of such measures? Are they likely to lead to
economic growth?
ANSWER 3: In exchange for assistance, the IMF required Egypt to undertake a number
of austerity measures designed to get its economy back on track. Egypt was asked to
Another Perspective: For more information on the impact of the IMF in Egypt, go to
{https://www.imf.org/en/News/Articles/2017/09/25/na092617-egypt-the-economy-is–
gathering-strength}.
Teaching Tip: To extend the discussion of the IMF, consider Largarde Takes Lead of
IMF at Key Moment for Global Economy in the International Business Library
at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video
title.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slide 11-3 What Is the International Monetary System?
The international monetary system refers to the institutional arrangements that
countries adopt to govern exchange rates. Governments adopt various types of exchange
rate systems including the pegged rate, the managed or dirty float, and the fixed rate.
Slides 11-4 – 11-6 The Gold Standard
The system of exchange rates known as the gold standard dates back to ancient times
when gold coins were a medium of exchange, unit of account, and store of value. The
amount of a currency needed to purchase one ounce of gold was referred to as the gold
par value.
Pegging currencies to gold and guaranteeing convertibility is central to the gold standard.
11-6
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McGraw-Hill Education.
In the 1880s, most of the world’s trading nations followed this exchange rate system.
Strength of the Gold Standard
The gold standard provides a powerful mechanism to pull trade imbalances between
countries back into balance-of-trade equilibrium.
Another Perspective: The Advantages of The Gold Standard was the topic of a 1961
paper by former Federal Reserve Board Chairman, Alan Greenspan. The paper is
available at {http://www.usagold.com/gildedopinion/Greenspan.html}.
The gold standard worked fairly well from the 1870s until the start of World War I in
1914, but by 1939 the gold standard had collapsed.
Slides 11-7 – 11-9 The Bretton Woods System
The Bretton Woods system established a fixed exchange rate system where all currencies
were fixed to gold, but only the U.S. dollar was directly convertible to gold. Devaluations
Another Perspective: For more information on the World Bank, go to:
{http://www.worldbank.org}. Click on “Data” to pull information on World Bank
activities, or on “Countries” to explore World Bank activities by country.
Slide 11-10 The Collapse of the Fixed Exchange System
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McGraw-Hill Education.
The Jamaica Agreement was signed in 1976 following the collapse of Bretton Woods.
The rules that were agreed on then are still in place today.
Under the Jamaica agreement:
• floating rates were declared acceptable,
• gold was abandoned as a reserve asset, and
• total annual IMF quotas were increased to $41 billion.
Exchange Rates since 1973
Exchange rates have become more volatile and less predictable than they were between
1945 and 1973.
Slides 11-13 – 11-14 Fixed versus Floating Exchange Rates
1. monetary policy autonomy,
2. automatic trade balance adjustments, and
3. help countries recover from financial crises.
Supporters of fixed exchange rates focus on monetary discipline, uncertainty, and the
lack of connection between the trade balance and exchange rates.
Who Is Right?
Today, the IMF focuses on lending money to countries experiencing financial crises.