Int Fin Mgmt - Chapter 2 Lecture (1/27 & 1/29)

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