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The International

Financial System

Chapter 13

2003 South-Western/Thomson Learning

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Slide 2

Learning Objectives

How and why international financial system ischanging

Role of international financial system under

Bretton Woods Accord

How present managed floating exchange rate

system works

Role the dollar plays in international financial

system

Roles of International Monetary Fund, World

Bank, and Bank for International Settlements

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Slide 3

International Financial System

The numerous rules, customs,

instruments, facilities, markets,

and international payments to bemade and funds to flow across

borders.

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Slide 4

International Financial System

944 to 973

Fixed Exchange Rate System

Exchange rate system

Currency values do not fluctuate

Official Reserve Currency

Currency used by other countries to

define their own currency

U.S. dollar was official reserve currencyunder Bretton Woods Accord

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Slide 5

International Financial System

944 to 973

Bretton Woods Accord

1944 agreement

Negotiated by major industrialized countries

Established fixed exchange rates with U.S.dollar serving as official reserve currency

Official Reserve Account

Balance of payments account

Records official government transactions in

foreign exchange market to bring balance of

payments into balance

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Slide 6

International Financial System

944 to 973

Devalue

Under a fixed exchange rate system

To decrease value of a countryscurrency

Revalue

Under a fixed exchange rate system

To increase the value of a countrys

currency

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Slide 7

Managed Float Exchange Rate

System

A system in which currency

values fluctuate with changes in

supply and demand, but central

banks may intervene if currency

values are thought to be over- or

under-valued.

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Slide 8

Managed Float Exchange Rate

System since 973

Floating (Flexible) Exchange Rate

System

Exchange rate system Currency values:

Determined by supply and demand

Fluctuate in response to changes in supply

and demand

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Slide 9

Major International Financial

Organizations

International Monetary Fund (IMF)- 1944 Oversees monetary and exchange rate

policies of its members who pay quotas(membership fees) used to assistcountries with temporary imbalances intheir balance of payments

World Bank - 1944

Investment bank Issues bonds to make long-term loans at

low interest rates to poor countries foreconomic development projects

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Slide 10

Major International Financial

Organizations

World Bank consists of

International Bank for Reconstruction &Development

Makes 12-15 year loans to poor (not poorest)countries

Charges an interest rate just above the rate atwhich bank borrows

International Development Association Makes interest-free loans with a maturity of 35-

40 years to worlds poorest countries

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Slide 11

Major International Financial

Organizations

International Finance Corporation Legally separate from the World Bank, but

closely associated with it

Mobilizes funding for private enterpriseprojects in poor countries

Bank for International Settlements

(BIS) An international financial organization that

promotes international cooperation among

central banks and provides facilities for

international financial operations

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Slide 12

Appendix: Comparing Returns in

Globalized Financial System

When comparing financialinstruments denominated in the

same currency, investors considerreturn, maturity, and default risk.

If instruments are denominated indifferent currencies, investors andborrowers must also consider theexchange rate risk.