Classical Gold Standard
- Promise to do a fixed exchange rate.
- Self-correcting system
- This standard can be done without a Federal Reserve.
- A problem for many economies is if rate of inflation gets too low.
- Gold can go up, but depending on the money supply depends on our
Bretton Wood Conference
- created the New Currency System
- created 2 institutions post World War 2 (IMF and World Bank)
International Monetary Fund (IMF)
- Help countries get out of international payment problems.
- If they don't have enough to pay principal on foreign denominator debt, etc, then they call in IMF to get a loan and help them out.
- They will lend you money at a low interest rate, but tells
International Bank for Reconstruction and Development
- The World Bank
- institution designed to fight poverty
- Build highways, railroads, airports, public health issues to help get people out of poverty REGARDLESS of their politics.
New Currency System
- Only currency that can be turned into gold is the dollar. converted at $35/oz.
- Other currencies are convertible into dollars.
- Therefore, dollar is the currency that can convert gold.
- Fixed exchange rates ---> fixed to the dollar.
- other countries
Bretton wood agreement fell due too.....
higher U.S. inflation in 1971
Dollarization or Euroization
Just adopt another currency.
- Ecuador dropped the sucre for the dollar in 2000.
Currency board
- There is no lender of last resort. Reserves based on foreign currency denominated assets held by Central Bank.
- Hong Kong did this.
- Also fixed vs. the U.S. dollar
Conventional "Peg" (conventional fixed rate)
- Saudi RIyal is fixed --> example of this.
- They have hundreds of billions in foreign currencies to keep rates stable.
- Target of + or - 1%.
Standardized Arrangement
- Range of fluctuation of 2%.
- Lebanese pound --> always between 1500 and 1525
Crawling Peg
- Nicaraguan cordoba gradually depreciates.
Other managed arrangement
- russia ruble
- large spurts of government buying
floating rate
facilitates international adjustments
fixed rate
business certainty
3 attributes of ideal currency
- currency stability
- free movement of capital
- domestic policy independence
---> AKA "Impossible Trinity