Documente Academic
Documente Profesional
Documente Cultură
NPM
Subject
Assignment
: Indira Sjahputri
: 1506772870
Class : KP 151 MMUI
: Multinational Finance
: Summary of Chapter 3 Multinational Business Finance
The currency arrangement negotiated at Bretton Woods and monitored by the IMF worked
fairly well during the post-WWII era of reconstruction and growth in world trade. However,
widely diverging monetary and fiscal policies, differential rates of inflation and various
currency shocks resulted in the systems demise. The US dollar became the main reserve
currency held by central banks, resulting in a consistent and growing balance of payments
deficit which required a heavy capital outflow of dollars to finance these deficits and meet the
growing demand for dollars from investors and businesses. Eventually, the heavy overhang of
dollars held by foreigners resulted in a lack of confidence in the ability of the US to met its
commitment to convert dollars to gold. The lack of confidence forced President Richard
Nixon to suspend official purchases or sales of gold by the US Treasury on August 15, 1971.
This resulted in subsequent devaluations of the dollar. Most currencies were allowed to float
to levels determined by market forces as of March, 1973
5. The floating Era of Eclectic Arrangements (1973 - 1997)
The exchange rates has been more volatile since March 1973. In these recent years, there are
several key events and external shocks that affected currency values. The most important
shocks in recent years have been the European Monetary System (EMS) restructuring in 1992
and 1993; the emerging market currency crises, including that of Mexico in 1994, Thailand
(and a number of other Asian currencies) in 1997, Russia in 1998, and Brazil in 1999; the
introduction of the euro in 1999; and the currency crises and changes in Argentina and
Venezuela in 2002.
6. The emmerging Era (1997 - Present)
The post-Asian Crisis of 1997 period has seen the growth in both breadth and depth of
emerging market economies and currencies. However, there are several arguments that argues
that the global monetary system is already more than a decade into the embracement of a
number of major emerging market currencies.
B. IMF Classification of Currency Regimes
The global monetary system is an eclectic combination of exchange rate regimes and
arrangements. For many years, IMF has been the central clearinghouse for the exchange rate
classifications. There are 8 spesific categories of currency regimes that described by IMF,
such as exchange arrangements with no separate legal tender, Currency board arrangements,
Other conventional fixed peg arrangements, Pegged exchange rates within horizontal bands,
Crawling pegs , Exchange rates within crawling pegs, Managed floating with no preannounced path, Independent floating .
C. Fixed Versus Flexible Exchange Rates
The choice of currency regime in a Country reflects the national priorities about all facets of
the economy, including inflations, unemployment, interest rate levels, trade balances, and
economic growth. The Ideal Currency possessed three attributes that reffered as The
Impossible Trinity because the forces of economic wont allow the simultaneous to achieve
all of three. The sides of the triangle describe about monetary independence, exchange rate
stability, or full financial integration. This following framework will describe about the
ultimate objective of Trinity element:
Picture C.1 The Impossible Trinity