International Monetary System and Exchange Rate Policies

International Monetary System and Exchange Rate Policies

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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). 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 rate, financial policies and domestic economic in consistence with the objectives. This means that a member does not impose restrictions on making payments or current international transactions transfer without the Fund's approval. It also holds consultation on exchange rate regularly, financial policies and macroeconomic policies with the IMF, shuns exchange rate policies that encourage unfair trade, and provides the IMF with data that it might need so as to carry out its responsibilities. Basically, the IMF has the task of maintaining stability of the international monetary systems through surveillance Michael C. Ehrhardt & Eugene F. Brigham, 2011()

How the system works

A nation has the ability to manage its currency value. This can be done by selling or buying the currency on the foreign market. This is done by a nation's central bank. When the bank buys its currency, the currency's supply decreases. Other currencies relative to it increase. This increases the currency's value.

Contrary, if the bank sells its currency, the supply for that currency is high in the market. Other currencies relative to it decrease in terms of supply and, this decreases the value of that currency Zagreb, 2000.

All this is operated mainly by the International monetary fund so as to help nations manage their currency's value. Monetary policies are also used to alter the current values of the currencies.

Impact of fluctuation in the exchange rate