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CONTENTS AND PURPOSE

1. Basic Elements of the International Monetary System2. Mechanisms for Establishing a Consistent International Monetary

System

• purpose: • podati konceptualne osnove, ki so potrebne za proučevanje mednarodnega

denarnega sistema

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1.Basic Elements of the InternationalMonetary System

• International monetary system = system of rules, mechanism and institutions that connects the national monetary systems into a consistent whole

• Role of the international monetary system:• ensure exchange rate stability• facilitate balance-of-payments disequilibria correction• ensure access to international liquidity

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• solutions for the acceleration of the size of the international goods and capital flows?• distribution of the benefits from these flows?

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1. Basic Elements of the InternationalMonetary System

balance-of-payments adjustments

international liquidity facilitation

consistency of the system and confidence

Balance-of-Payments Adjustments

• long-run equilibrium in the current account!• neoclassical view and realistic circumstances in the

world economy:• validity of the automatic elimination of the balance-of-

payments disequlibria assumption?• analysis of the balance-of-payments disequilibrium

emergence?• difference in different groups of economic agents?

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balance-of-payments disequilibria elimination process

International Liquidity Facilitation

• definition of international liquidity• two segments:

• international liquidity under the ownership of the central bank

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foreign exchange reserves of the CB

gold

unused gold tranche at the IMF

Special Drawing Rights (SDR)

International Liquidity Facilitation

• international liquidity under the ownership of all other agents in the economy:• operative foreign exchange reserves of commercial banks• foreign exchange assets of non-banking subjects abroad • short-term foreign assets of the residents • long-term, prenosljive foreign bonds of the residents• possibilities of the banks to get credits for financing balance-of-payments

deficit abroad

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sources of financial assets to increase IMR: privatni sources of capital public sources of capital

Consistency of the System and Confidence

• relevance of the mechanism for the elimination of balance-of-payments disequilibria• appropriateness of the size of the international liquidity

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n-1 countries can decide independently on their balance-of-payments balance:

n-th country accepts the balance that is determined by all the other countries in the system

establishment of a mechanism for the coordination of the balance-of-payments goals

2. Mechanisms for Establishing a Consistent International Monetary System

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automaticadjustmentmechanism n-1 system

internationalcoordinationsystem

monetary unionsystem

Automatic Adjustment Mechanism

• changing the level of foreign exchange supply and demand:• flexible exchange rate:

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deficit

domestic currency depreciation

D for & S of foreign exchange

balance-of-payments equilibrium

Automatic Adjustment Mechanism• fixed exchange rate:

• through price changes• through changes in aggregate expenditures

Balance-of-payments deficit

Fall in aggregate expenditures

Fall in supply of money

Lower rate of inflation

MultiplierDecrease in GDP

Improved competitiveness relative to other countries

Price elasticities

Marginal propensity to import

Decrease indomestic demand

Decreased imports

Increased exports

Decreased imports

Increased exports

Decrease in the deficit

n-1 System

• n-th country currency (N-currency) is convertible into a widely accepted good at a fixed price, the currencies of all other countries are related to it in a fixed relationship• no automatism!• countries must accept and implement economic policy

measures for balance-of-payments adjustments

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Countries with a surplus are under significantly lower pressure to adjust their balance-of-payments!

• countries with a balance-of-payments deficit carry a relatively higher cost burden• N-country must accept whatever net balance-of-

payments position is dictated by the group of n-1 countries in the system:• strong and a fairly closed economy at the same time• N-currency must be stable

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International Coordination System

• economic policy coordination of the world economic forces & exchange rate movement coordination• crucial: exchange rate regime choice• reasons for balance-of-payments disequilibrium:

• external shocks• weak or no accordance in the economic policy of individual

countries

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flexible exchange rate easier reaction to asymmetric shocks& more possibilities for independent economic policy

Monetary Union

• countries completely give up their national monetary policy and surrender it to some above-national institution

• common currency becomes the only legal tender in all monetary union member countries

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