International Monetary System and Exchange Rate Policies Essay

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International Monetary System and Exchange Rate Policies

A report/essay: chapter 17, multinational companies. select topic research write: Multinational vs. domestic financial management exchange rates international trade international monetary system exchange rate policies trading foreign exchange european monetary union interest

rate parity/purchasing power parity international capital structures.

The international monetary system and exchange rate policies

International Monetary systems

These are a set of rules and that regulate how international trade and payments are handled. It facilitates the exchange of capital, goods and services among countries. However, this system does not have a physical presence but, it consists of interlacing rules and procedures and is influenced by the market of foreign exchange. An example of an international monetary system is the International monetary fund. These interlacing rules and procedures are referred to as exchange rate Policies.

Exchange rate policies

These are rules that officials of public finance from different nations have developed and put in place and, they modify them from time to time. These policies are also considered as physical institutions. These institutions oversee the international monetary systems.

After the World War II around 1944, 45 nations met in New Hampshire. These nations met to discuss Europe and how it would recover from the effects of the World war and also they intended to resolve issues concerning international trade and also monetary issues. This led to the establishment of the International bank which is also known as the World Bank. This was meant to manage the fixed exchange rates of the international monetary systems.

This led to the establishment of a stable exchange rate. The member nations that were under this agreement agreed to a system that pegged the value of other currencies to that of the dollar and also pegged the dollar's value to that of gold (the Bretton Woods system).

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This system lasted till 1972 when the pegged exchange rate broke down and was replaced by the current exchange rate of managed float. This former system broke because the value of a nation's currency is affected by the dynamics of demand and supply and also the prices of the commodities in that nation. This is regardless of policies that peg the currency to certain policies and even fixed rate schemes. The said dynamics need to be reflected in the currency's value in the foreign exchange, and if they do not then the currency is either overvalued or undervalued compared to other currencies. When the price of a currency is either too high or too low, the international trade flow becomes distorted.

When the Bretton Wood system broke, the U.S. decided to let the dollar float against other world currencies. This was aimed at trying to find the proper value of the dollar and also tried to correct the imbalances in international funds flow and also in trade. This led to the evolution of the current managed float system Eichengreen, 2011()

Members of the International Monetary System

By becoming a member of the International monetary system, a country devotes itself to certain responsibilities found in the articles of agreement found by the IMF. These responsibilities include collaboration with other members in the system to promote and sustain a stable system of exchange….....

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