International Monetary Fund

the International Monetary System is a set of internationally agreed rules, convention and supporting institutions that

facilitate the international transactions (trade, Foreign Direct Investments, reallocation of capitals)

Fiscal Policy Monetary Policy Exchange Rate Regime

Modern economic systems are all open; The International Monetary System

influenced the macroeconomic policy; The macroeconomic policy has two main

goals:

Internal Balance External Balance

This goal requires: Full employment of human and physical

resources; The stability of the price level.

Full employment Price level stable

It’s more difficult to define the external macroeconomic goal of each country, because the equilibrium depends on several factors: Economic particular circumstances; Conditions of outside world; Institutional arrangements governing economic

relations with foreign countries.

Since the 19th century the world economy has evolved through a various international monetary system;

Social, economic and political factors influenced countries to adopt one system rather than another.

The trilemma focus on three goals whose each country want achieve: Exchange rate stability; Monetary policy orientated toward domestic

goals; Freedom of international capital movements.

Since the 19th century we assist a succession of different international monetary system:

Gold Standard (1871-1939);

Gold Exchange Standard (1944-1971);

Floating Exchange Rate System (1973 to present)

Each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold

whenever necessary to defend the official price.

Each country pegs its currency’s price in terms of the official international

reserve asset: gold

International Reserve

A practical example:The Dollar currency’s price was fixed at $35 per ounce by FED;

The Pound currency’s price was fixed a £14,58 per ounce by Central Bank of England.

Which was the exchange rate $/£?($35 per ounce)÷(£14,58 per ounce)= $2,40 per pound;

And the exchange rate £/$?(£14,58 per ounce)÷($35 per ounce)= £0,4166 per dollar.

Benefits: Symmetric Monetary Adjustment; The Central Banks of the world had the duty to fix

their currency’s price in terms of gold; The Gold Standard permitted to maintain stable the

domestic price level. Drawbacks:

It implies an undesirable constraints on the use of monetary policy to fight the unemployment;

The domestic stability price level was ensured only if the gold and goods level price was stable;

The Central Banks were not encouraged to hold foreign currencies as reserve;

The Countries with large gold production had more ability to influence the gold price.

This monetary system is halfway between the gold standard and a reserve currency standard.

The Central Bank reserves consist in gold and currencies with a fixed gold price.

The Bretton Woods Agreement settled the dollar currency as official international reserve together

the gold.

On July 22nd, 1944 the Bretton Woods Agreement was drafted and signed by 44 countries;

The Bretton Woods Agreement aimed to avoid the repetitions of the turbulent interwar experience.

The main problem of this International Monetary System was the strict relation of dollar as official international reserve and international medium of payment.

In fact to increase the Monetary World Demand occurred that the US Payments Account was always in deficit. This situation had consequence on dollar currency.

On August 15th, 1971 the President Nixon declared the end of Convertibility of Dollar and the end of Bretton Woods

In March 1973 the International Monetary System adopted a Floating Exchange Rate Regime with the aim to overcome the

International and National Instabilities

Monetary policy autonomy

• CB not obliged to intervene in currency markets to fix exchange rate;

• Governments would be able to use monetary policy to reach internal and external balance;

Symmetry

• USA would no longer to be able to set the world monetary conditions;

• USA had the same opportunities as other countries to influence the exchange rate markets

Exchange Rate

• As automatic stabilizers: the swift adjustment of exchange rates would help countries to maintain the internal and external balance.

• And External Balance: as to prevent the emergence of big current account deficits or supluses

On July 22nd 1944 The governmental representatives of 44 Countries drafted and signed the Bretton Woods

Agreement that found the International Monetary Fund

The IMF’s main goal is to promote world economic stability and growth

188 Member States

To Facilitate the expansion of international trade, to contribute to maintain an high level of employment and to develop of productive resource

To promote exchange stability to avoid competitive exchange depreciations

To Promote international monetary cooperation through an institution

To assist the establishment of multilateral system of payments

To give confidence to members by making the general resources of the IMF

To lessen the disequilibrium in international balances of payments

The Board of Governors: It’s the highest decision-making body of the IMF. It

consists of one governor and one alternate governor for each member country. The governor is appointed by the member country and is usually the minister of finance or the head of the central bank;

it retains the right to approve quota increases, special drawing right (SDR) allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and By-Laws;

The Board of Governors also elects or appoints executive directors and is the ultimate arbiter on issues related to the interpretation of the IMF's Articles of Agreement.

Ministerial Committee: The IMF Board of Governors is advised by two

ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee;

The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the Fund.

The Executive Board: The IMF's 24-member Executive Board takes care of the

daily business of the IMF. Together, these 24 board members represent all 188 countries. Large economies, such as the United States and China, have their own seat at the table but most countries are grouped in constituencies representing 4 or more countries. The largest constituency includes 24 countries;

The Board discusses everything from the IMF staff's annual health checks of member countries' economies to economic policy issues relevant to the global economy. The board normally makes decisions based on consensus but sometimes formal votes are taken. At the end of most formal discussions, the Board issues what is known as a summing up, which summarizes its views. Informal discussions may be held to discuss complex policy issues still at a preliminary stage.

Surveillance over Members’

Economic Policy

Financing Temporary Balance of Payments

Needs

Combating Poverty

Mobilizing External Financing

Strengthening the

International Monetary System

Increasing the Global Supply

of International

Reserves

During The Gold Exchange Standard, the main functions of IMF were: Financing Temporary Balance of Payments Needs Surveillance over Members’ Economic Policy Guaranteeing the exchange rates’ stability.

The country members of the Bretton Woods System paid a year quota as IMF capital reserve with the aim to finance the Countries’ imbalances of payments account.

Each Country quota was: 25% in gold and 75% in domestic currency

In 1969 The IMF introduced the Special Drawing Rights (SDRs), they were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates.

When the Bretton Woods System fell in 1971, the main functions of IMF was: The world economic stability and growth

The IMF constrains the loans’ system to Structural Adjustment Programs (SAPs);

The IMF implemented its interventions to help the Developing Countries (50 millions of gold ounces to increase of money supply);

During the 80s, IMF adopted the Washington Consensus, it’s a set of rules to face the macroeconomic instability;

The Pillars of WC are: Austerity, Privatizations and Markets Liberalization.