Chapter 19
The International Financial System
Chapter 19 shows why international financial transactions have important implications for the
conduct of monetary policy. The beginning of the chapter explains how foreign exchange market
intervention affects the exchange rate, a country’s international reserves, and the money supply.
It then discusses the balance of payments, but this sometimes-dry topic can be spiced up for
students by a discussion of the box on why large current account deficits worry economists.
The currency and financial crises in in recent years have caused policymakers throughout the
world to focus on how the architecture of the international financial system might be reformed in
order to limit the threat of financial crises. Concerns about international financial architecture
have led to a lively debate, to say the least, about the role of the International Monetary Fund and
capital controls. I use the discussion in the text on these subjects to stimulate a lively debate
among the students, which gets them to realize that what happens outside the United States is
still of tremendous importance to us. The next section on international considerations and
monetary policy explains how international financial transactions and movements in the
exchange rate can affect monetary policy, and this material is closely related to the discussion in
Chapter 17 about the conduct of monetary policy.